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Fortune: The Great Emerging Markets Rip-Off
By Kapal Berita
21/10/2000 1:20 am Sat
Ini merupakan satu bahan kajian dari Fortuna Magazine.
Mengapakah FDI agak rendah? Walaupun Moody baru meninggikan
taraf beberapa sektor penting di Malaysia, FDI masih berdegil
untuk berada diparas yang sedikit itu.
Bayangkan tahun ini sahaja begitu banyak menteri mengembara.
Rafidah Aziz ke Eropah. Sebelum itu beliau ke USA dan Korea.
Pak Lah pula balik dari Jepun. Mahathir... tak sah cerita -
USA jumpa Motorola kena menawar, UK beliau melecture CAMUS
tapi dilecture oleh Tony Blair! Sekarang pergi Korea pula...
Kini RM3 billion sudah hangus dalam skandal Hottick-NSC-Halim Saad.
Para analis sudah nampak sejak 1998 lagi.....
Kita dengar apa komen lama Fortune Magazine, pada 5/11/1998.
ISSN 0015-8259) Vol. 137 No. 9 page 98+
Before you even think about investing in emerging markets again, look
closely at what's just happened in Asia. The bottom line: You can't trust the
companies, you can't trust the governments, you can't trust the analysts, and
you can't trust the mutual fund managers. Watch out.
Every weekday morning back in 1993, the most delirious year of the giddy
1990s Asia investing boom, stockbrokers from all over Southeast Asia called
up mutual fund manager Robert Howe in Hong Kong with a question.
"What's the fax?" they would ask.
The fax was the daily missive from the Baltimore headquarters of Howe's
employer, mutual fund giant T. Rowe Price, telling him just how much money
retail investors across the U.S. had dumped into the T. Rowe Price New Asia
fund the day before--money that he now had to put to work in Asian stocks.
And what was the fax? "I'd say, '$50 million,' " Howe recalls. "And they'd
say, 'Whoa!' "
The world had never seen anything quite like this, at least not since the
period between the Civil War and World War I, when wealthy Europeans
poured money into stocks and bonds in developing countries like the U.S.
This time investors in the slow-growing U.S. and Europe were buying into T.
Rowe Price New Asia and other funds like it because they wanted a piece of
that "Asian economic miracle" they'd heard so much about. They could back
up that decision with a lot of academic research that seemed to show that
diversifying into emerging markets could increase returns without adding risk.
It hasn't worked out that way--$100 invested in Howe's New Asia fund when
inflows were at their peak at the end of 1993 is now worth just $62. That same
$100 invested in an S&P 500 index fund would be worth $262. It's not just T.
Rowe Price New Asia (its performance has been pretty much middle of the
pack) or even Asia itself. Emerging-markets investing in general has turned
out to be a bust. Thanks to the Mexican peso crisis in 1994 and the Asian
implosion of 1997, emerging-markets indexes have significantly trailed major
Western stock markets during the 1990s. And new research examining
emerging-markets returns from 1975 to 1995 shows underperformance during
that time span as well. "Not only are emerging markets more volatile," says
James Montier, global strategist at Natwest Markets in London, "but over the
long run you get the perverse result that you aren't rewarded for it with higher
This is bad news, and not just for investors. The boom in emerging-markets
investing was a remarkable opportunity to get the economies of the
developing world moving according to market principles. Instead of
governments extending foreign aid, or banks making loans, you had private
investors around the world picking and choosing which countries and which
projects to support. It seemed only natural to expect that their choices would
lead to a more efficient use of resources, greater economic prosperity--and
impressive investment returns.
To understand why that hasn't happened--at least not yet--one has to get
away from asset-allocation models and sector weightings and visit the real
world. Because it's in the real world that all the money flowing into
emerging-markets stocks ($210 billion since 1990, according to the World
Bank) was actually invested. And it's in the real world that a lot of that money
One of the greatest of all the money losers for U.S. and European investors
was a company called United Engineers (Malaysia). UEM builds bridges,
stadiums, and the like, and it operates the impressive toll road at left. For a
time, it was just about the hottest stock in the hottest emerging market in the
world. Robert Howe's T. Rowe Price New Asia owned a big chunk. So did the
Vanguard International Growth fund. Same with the Dean Witter Global
Dividend Growth fund. Fidelity Contrafund. The California Public Employees'
Retirement System. Dutch mutual funds. Scottish pension plans. Australian
insurance companies. Irish banks.
They don't anymore. Last year the foreign fund managers abandoned UEM in
spectacular fashion; the company lost 90% of its market value in less than six
The story of how UEM rose, and then fell, is about as good an encapsulation
as there is of the sprawling saga of emerging-markets investing in the 1990s.
It's got the elements already offered as causes for the Asian market collapse:
sloppy accounting, inadequate regulation, "crony capitalism." But there's
much more to it than that:
There are the global brokerages and investment banks willing to tout
even the iffiest of emerging-market plays. And most of all, there are the
behavioral patterns of the mutual fund industry, which may
be destined to wreak havoc in emerging markets. "It takes two to tango," says
Mark Bickford-Smith, who worked with Howe on T. Rowe Price New Asia and
now co-manages the company's International Stock fund. "And the providers
of capital, not just in Malaysia but all over Asia, are just as much to blame as
Now, as foreign money begins to flow back into Asian markets, it's important
for investors to remember this:
You can't trust the companies. You can't trust the governments.
You can't trust the analysts. You can't even trust the mutual fund managers.
So read closely, and watch out.
In Malaysia the growth was exceptional. Three decades ago the country was
a sleepy land of tin mines and rubber plantations, its per capita income about
the same as Guatemala's. By the mid-1990s it had become an economic
powerhouse, with GDP growth averaging 9% a year (compared with less than
2% in the U.S.). It had become one of the world's largest producers of
semiconductors and a major maker of cellular phones and stereos as well. Its
roads were clogged with made-in-Malaysia cars. The world's tallest
buildings were rising in Kuala Lumpur, the capital city.
The catch was this:
You don't invest in an economy, you invest in companies.
"It's a bit of a cliche, but there are no Cokes or Microsofts or
Nestles in Asia," says T. Rowe Price's Bickford-Smith.
"There are very few companies that have a franchise and are able to squeeze the bottom line."
There were companies like that doing business in Malaysia, helping drive the
country's growth by exporting high-tech, high-value products to markets
around the world. But they had names like Intel, Motorola, and
Ericsson--and you couldn't buy their stock on the Kuala Lumpur exchange.
What you could buy was the usual emerging-markets mix of utilities, resource
companies, builders, land developers, and banks. And in Malaysia, as in just
about every emerging market--including the U.S. in the 19th century--these
companies were usually tied up in hard-to-value webs of interlocking
shareholdings and government connections. That's what is now popularly
known as "crony capitalism." United Engineers was in the thick of it.
The chief "cronies" in UEM's case were a couple of guys named Daim
Zainuddin and Halim Saad. Daim, a lawyer of ethnic-Malay origin, had some
success as a property developer in the 1970s. That made him a novelty in
the Malaysian business world, which had been dominated by the country's
Chinese minority and by British-controlled corporations left from colonial
days. So when Malay-rights advocate Mahathir Mohamad began his rise to
political power in the late 1970s, he saw Daim as someone who could help
fulfill his dream of lifting the bumiputras, the mostly rural ethnic Malays who
make up about 60% of the population, to economic preeminence.
Mahathir, who became Prime Minister in 1981, first put Daim in charge of a
government-owned property-development company called Peremba. Then
he anointed Daim chairman of Fleet Holdings, the investment arm of the
United Malays National Organization--the political party that has ruled
Malaysia since independence. In 1984, Daim became Minister of Finance
and treasurer of UMNO.
Up to then, the Malaysian government's economic strategy had been based
on redistributing wealth to the Malay majority through taxing and spending. In
1985, though, recession hit, brought on by price collapses in all the
commodities upon which the Malaysian economy was based--rubber, tin,
palm oil, and petroleum. "I then decided, if there was no growth, what is there
to distribute?" Daim recalls. "Then I said, 'Look, it's no business of
government to be doing business.' " Daim came up with a two-pronged
Invite foreign corporations to open factories in Malaysia, easing
restrictions on foreign ownership, while placing as many government projects
and enterprises as possible in private hands. Not just any private hands, of
course, but those of Malays. And not just any Malays, but those with the
educational background and business experience to make a go of it.
That left only a few candidates, most of them young proteges of Daim. Which
is how Halim Saad, a New Zealand-educated accountant who had worked
for Daim at Peremba, came to lead a UMNO-funded takeover of a floundering
engineering firm in 1985--and how a year later that firm, United Engineers
(Malaysia), landed the multibillion-dollar contract to complete the
North-South Expressway, a 527-mile toll road that the government had
started building but hadn't been able to complete. Later came a concession
agreement that lets UEM collect the tolls on the road until 2018.
The deal was controversial. An opposition leader sued, claiming corruption in
the awarding of the contract, and took it as far as Malaysia's Supreme Court
before losing a three-two decision. (Angered by this close call and several
other decisions, Mahathir ousted three Supreme Court justices in 1988 and
replaced them with friendlier sorts.)
Halim Saad--in his early 30s when he took over UEM--wasn't deterred by
the controversy. He reorganized the ruling party's Fleet Holdings into a new
company called Renong, which ended up with 38% of the shares of United
Engineers. Half of UEM's toll road concession, meanwhile, ended up in the
hands of another Renong subsidiary. And Halim became controlling
shareholder of Renong--although it was widely assumed that his shares
really still belonged to UMNO, or maybe to Daim. (Daim says halim truly
owns the shares; Halim refused FORTUNE's interview requests.)
This was how Malaysia Inc. worked. It wasn't pretty, but it enabled members
of an economically disadvantaged group to rise to wealth and power without
resorting to violence--or even appropriating the property of ethnic Chinese
or foreigners. And UEM did more than just make Halim Saad rich and
powerful. It built the road it was hired to build--and what a road it was.
Slicing down the Malay peninsula from the Thai border in the north to
Singapore in the south, the North-South Expressway changed the nation
when it was completed in 1994, over budget but a year ahead of schedule.
The once-excruciating trip from Kuala Lumpur to Singapore was transformed
into an almost pleasant four-hour drive. Rural areas miles outside the capital
city suddenly looked like potential suburbs and office parks. And the foreign
high-tech companies that had begun settling in Malaysia in the late 1980s
now had a transportation backbone they could rely on to get parts quickly for
ENTER WALL STREET The foreign money managers weren't involved in
UEM's formative years. Before 1990 only a few were even investing in
Malaysia. Then they came in droves, and they changed everything--for
UEM, for Malaysia, even for the world.
The practice of people from rich countries buying stocks or bonds in
emerging markets, which had been a crucial factor in U.S. economic growth a
century ago, had died in the Great Depression. But after the Third World
bank-lending debacle of the 1970s and early 1980s, the World Bank came to
the conclusion that portfolio investing might be a better way to channel
capital to developing countries. Its International Finance Corp. helped set up
closed-end country funds operating in places like South Korea and Thailand,
and then, in 1986, put up seed money for the first "emerging markets" fund
(the phrase was coined by Antoine Van Agtmael, then an IFC staffer, now an
emerging-markets fund manager). It was run by Capital Group, the Los
Angeles money management giant.
These early funds were tiny: Capital's Emerging Markets Growth fund started
out with just $50 million, and its managers took a year to find places to invest
all the money (almost a quarter went to Malaysia). The fund, open only to
institutions, did exceptionally well, with total returns to investors of 24% in
1987, 42% in 1988, and 94% in 1989.
Those numbers drew in more and more money managers, which set the stage
for the mad rush of 1993, when Robert Howe at T. Rowe Price New Asia
sometimes had to invest as much in a day as the Capital fund's managers had
had to invest in an entire year just six years before. That meant, of course,
that emerging-markets fund managers could no longer be as picky as the
pioneers of the late 1980s. It also meant that foreign fund managers became
big factors in the markets they invested in. Almost $15 billion in net foreign
investment flowed into emerging Asian stock markets in 1993, up from the
previous record high of $2 billion the year before. It was no coincidence that
Thailand's stock market went up 88% that year, Malaysia's 98%, Indonesia's
Chasing after all those investment flows, and all those gains, were U.S.,
British, and Hong Kong brokerages that opened research offices in Kuala
Lumpur and other Southeast Asian capitals. The young analysts who staffed
the offices were handy for setting up fund managers' visits, making
appointments with CEOs, and providing cars and drivers to navigate the
increasingly chaotic traffic. Their actual research had its problems: One was
the usual pressure to go easy on their firms' potential investment-banking
clients; another was a heavy reliance on one-to-one contacts with corporate
executives. If an analyst did something to offend a company, he might be cut
off from basic data about its operations.
These are relatively unsurprising phenomena. What was more curious, as
emerging-markets investing grew from a quirky backwater to big, big
business, was the effect on the emerging-markets fund managers: As they
became more powerful and visible and, presumably, highly paid, they were
given less and less freedom to use their own judgment.
The whole point of hiring a money manager, one might think, is to give a
smart, well-compensated person with access to lots of information the chance
to make informed calls on what is a good investment and what is not. But
while the investing world still pays obeisance to people who've succeeded in
doing just that--Warren Buffett, Peter Lynch, Michael Price--the realities of
the fund world now discourage such behavior. The first reality is that, in the
absence of a famous manager, specialized funds are much easier to sell to
investors than generalist ones. The second is that for a fund to attract
investors, actually making money is much less important than keeping up with
a benchmark--such as the S&P 500, or the MSCI Emerging Markets Free
index. The safest thing to do is buy the stocks that make up the benchmark.
Few fund managers go that far. But it's undeniable that somebody like Robert
Howe, with more than $1 billion pouring into his fund in 1993, didn't really
have many alternatives. Consider what happened late that year, when Asian
stock prices got too expensive for Howe's tastes. He first increased cash
holdings to 12% of the fund, but his bosses at T. Rowe Price told him that was
too high. He couldn't invest outside the region either--this was the New Asia
fund, after all. And while Howe definitely had freedom to, say, sell Malaysian
stocks and switch the money into Hong Kong's market, this freedom was
limited by the realities of benchmarking. Malaysia in late 1993 made up about
a quarter of the two most important benchmarks for investors in the region. It
was the world's preeminent emerging market--the one that no foreign fund
manager could pass up. You could "underweight" it, a common phrasing that
indicates the ubiquity of the indexes, but selling out of it was out of the
Martin Wade, the London-based president of Rowe Price Fleming
International and lead manager of all T. Rowe Price's international funds,
defends these limitations on the ground that money managers have a pretty
bad record of calling market turns. But, he adds, "all the forces are combining
to confine us to managing very closely according to the mandate and not
going the more gung-ho route." So in the end, what Wade and Howe did in
late 1993 was to move some money into Australian and New Zealand
stocks--and write a letter to shareholders warning them not to keep too big a
percentage of their portfolio in the New Asia fund.
THE HOT STOCK Howe, a Washington, D.C., native then in his mid-30s,
had come to the New Asia fund in early 1993 after several years of investing
in Japan for T. Rowe Price. He quickly became a Malaysia enthusiast--and
a big UEM shareholder.
"There was a decision at the top level in Malaysia to
channel corruption benignly through the stock market," he says.
That meant the government granted lucrative contracts to companies in which
the ruling party or well-connected individuals held big stakes--but made sure
the work was done, and done well. "These were real projects," Howe says.
UEM's political debts, along with its inexperience in building roads, had
initially scared away foreign investors. But by 1993 it was clear the toll road
was going to be finished, and UEM had landed a major new contract to build
a bridge linking the road to Singapore. Analysts and money managers came
around to the idea that if political connections could lead to a steady diet of
lucrative government contracts, maybe they weren't such a bad thing. The
company's stock price quadrupled in a year, and soon the Kuala Lumpur
stock exchange was teeming with companies claiming to be "the next UEM."
In 1994 the Malaysian market underwent a correction, as Howe had feared it
would. A lot of the "new UEMs" foundered, but UEM itself did just fine as toll
revenues began pouring in from the newly completed North-South
Expressway. Morgan Stanley had no trouble that year selling foreign
investors on $200 million in UEM convertible bonds. Things only got better in
1995 when Halim Saad gave back to UEM the share of the toll road
concession that he had moved into another of his companies years before.
(Remember, we said to read closely.)
Halim capitalized on UEM's success to raise his sights, building Renong,
previously a holding company of little interest to outside investors, into an
infrastructure giant and investment story in its own right. With help again from
Morgan Stanley, Renong raised $400 million selling convertible bonds in
1994 and 1995, and began showing up in more stock portfolios as well.
Although quite shy, Halim became an internationally known figure. In
December 1994, Time International put him on its Global 100 list of under-40
leaders for the next century.
Scores of fund managers added UEM to their portfolios--by the end of 1996,
54% of its shares were in foreign hands--and the number of analysts
following the company and making regular earnings estimates grew to 30.
That's twice as many as cover General Electric, according to First Call,
which tracks securities analysts. It was hard to know what to make of all the
research reports they produced. "In the U.S. it's easier--with GE or IBM you
know the intrinsic value of the company will keep growing," says Edmond
Cheah, chief executive of KL Mutual, Malaysia's oldest and biggest mutual
fund company. "In UEM's case you're not sure; if its political influence fades,
you've got a problem."
Late in 1995, John Godfray, a Hong Kong-based analyst with Dresdner
Kleinwort Benson, concluded that there was, in fact, a problem. Godfray was
worlds different from the Kuala Lumpur-based analysts who usually covered
Malaysian companies. His specialty was Hong Kong conglomerates, he was
a chartered accountant with experience as a corporate executive, and he
was over 40. He was far less impressed than his peers by the quality of
UEM's earnings, and he wrote a lengthy, critical report. His recommendation,
in big, bold letters: SELL.
He sent out the report...and nothing happened. UEM's stock kept rising. "I
thought, 'Hell, I got Malaysia wrong,' " Godfray says. "'I can't be right and
everybody else wrong.' "
Frances Dydasco paid attention to Godfray's report. In fact, she still has it on
file in her office in Singapore. After Howe left in 1996 to start a hedge fund,
Dydasco joined T. Rowe Price to co-manage the New Asia fund. Now 31,
Dydasco had been investing in Asia since the late 1980s, and she was
extremely uncomfortable with the direction the Malaysian market was headed.
Things certainly seemed frothy. Equity investment flows to Malaysia and to
emerging markets in general in 1996 broke the records set in 1993.
Malaysia's stock market capitalization grew to more than three times its GDP
(in the U.S. the ratio is currently about 1.5 to 1). And Malaysia's tycoons were
using their newfound stock market riches in disturbing ways, such as taking
out loans collateralized by their stock holdings to invest in ventures too risky
(or too lucrative) to do within their publicly held companies. The stock
exchange itself, despite some attempts to clean things up, was rife with
insider trading and market manipulation. "For such a long time you just looked
at it and said, 'This is a house of cards, but when is it going to go?' "
Late in the year Dydasco and Bickford-Smith of the T. Rowe Price
International Stock fund traveled to Kuala Lumpur to talk to Halim Saad about
the situation at UEM and Renong, which together accounted for about 4% of
New Asia's $2 billion in assets. They wanted to know if Halim would be
willing to sell off assets to pare down the huge debt load Renong had built up
as it took on big new projects. Halim's answer: no way.
So Dydasco and Bickford-Smith decided to start selling their Renong and
UEM shares. More investors soured on the group when Halim bought an
ailing Philippine steelmaker from another Malaysian tycoon in 1997 (he
reportedly did it as a favor to Prime Minister Mahathir, who had asked Halim
as a favor to Philippine President Fidel Ramos), and hinted that he wanted to
foist the company, which had cost him $800 million, on Renong or UEM.
Several regional investment strategists warned that spring about Malaysia's
dangerous mix of high debt and overbuilding, and when the Thai currency
crisis jumped the border into Malaysia in July, the flow of foreign fund money
into the country was thrown into full reverse. UEM was hit hard by the
ensuing stock market collapse. Renong's stock price held curiously steady.
Foreign fund managers still held a lot of UEM shares. In some cases this was
due to the simple inability or unwillingness of a big mutual fund to move
quickly; despite selling millions and millions of UEM shares over the previous
six months, Dydasco and Bickford-Smith still had six million between them as
of Oct. 31. Other fund managers apparently thought UEM was a bargain:
Dean Witter International Dividend Growth and Vanguard International Growth
both bought millions of UEM shares in 1997. Robert Howe, meanwhile, did
something he never could back at T. Rowe Price New Asia. His new hedge
fund, Geomatrix Investment, sold UEM short. "We picked it because UEM was
the last-loved stock by foreigners," he says. "It's just a bear market
rule--everything you love betrays you."
COLLAPSE The rule proved true on Nov. 17, when everybody found out why
Renong's stock price had stayed so eerily steady all those months. UEM
announced that it had spent $700 million to buy 33% of Renong on the open
market. The company's executives said it was a good investment; analysts
speculated that Renong's stock price was being propped up to protect big
local stockholders. UEM's foreign shareholders panicked--the relatively
straightforward, cash-generating company they owned had suddenly gone
deep into debt to buy into its troubled, complex parent. UEM's already
battered stock price took another 43% hit during the week; the Kuala Lumpur
composite index dropped 17%. UEM was Renong's biggest asset, so
Renong's share price fell as well, more than 50%.
Later in November, the Malaysian regulators acted and, if anything, made
things worse. They suspended trading in UEM and Renong stock for more
than a month, and announced that UEM and Halim, who together now owned
more than 50% of Renong, were required to make a general offer to buy the
rest of Renong's stock. But in January the government quietly backed
down--buying out the shareholders might have sunk Halim's business
empire, and nobody in Malaysia, especially not his creditors, wanted that.
UEM was hit with a couple of small fines, but that, says Daim
Zainuddin--who retired from government in 1991 but has been called back
as economic czar--is all that's going to happen.
Malaysia's failure to act forcefully has made the case a symbol in the
international investing community for all that was wrong with the country, and
with Asia in general. "Malaysia went past a turning point where it became
very obvious to global investors that the government was going to save itself
first at the expense of the foreigners, and that no rule is safe, no law is safe,"
says the manager of an American mutual fund caught holding a big UEM
stake. "Malaysia had some sort of phony aspirations to be a financial center,
and that's now completely out the window."
He's got a point. But, given the behavior of the world's mutual funds, it's also
a cop-out. Before the fall, fund managers failed to accurately price in the risk
posed by Malaysia's amorphous rule of law, and by Renong's history of
shifting assets between its subsidiaries. During the fall, they abandoned the
country in a thundering stampede--making no attempt to stay behind and
fight for their rights as shareholders. When UEM finally held a shareholder
meeting in February to discuss its Renong purchase, the big foreign fund
managers didn't show. They had already sold.
Now, however, the foreign mutual funds are starting to come back. They can't
help it: Thanks to buying by Malaysian government agencies, local investors,
and hedge funds--and the extremely low level it started at--the Kuala
Lumpur exchange is up more than 20% so far this year. Word on the street
has it that Morgan Stanley may underwrite a $400 million bond issue for UEM
to help pay for all those Renong shares.
What's a prudent investor to do, other than to abandon emerging markets
entirely? One alternative is to buy the best-run companies doing business in
places like Malaysia--Dell, Procter & Gamble, and their ilk. But they
probably won't deliver the spectacular returns that emerging-market stocks,
in good years, can.
What you should not do is dump your money in a New Asia fund and expect to see it triple in ten years. Either hand it over to a mutual fund manager (or, if you can afford the $250,000 minimum, a hedge fund manager) with a broad mandate to invest all over the world as he or she sees fit, or be willing to watch a more specialized fund investment with a suspicious eye, ready to jump out before everyone else does. Then maybe, just maybe, you'll survive the next emerging-markets panic.