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November 10, 1997 12:00 AM

RECALLING HIGH RETURNS BALANCES THE GOOD, BAD

Linda Kay Sakelaris
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    High returns enjoyed by some emerging markets debt portfolios earlier this year might soften the blow portfolio managers felt following recent Southeast Asian currency devaluations.

    The impact of the economic problems faced by countries in that region rippled into more areas as investors betting on other emerging markets, particularly South America, hesitated or pulled back and bond prices fell.

    There was a 12% drop in value of the emerging country debt portfolio of Grantham, Mayo, Van Otterloo & Co. L.L.C. in the last week, even though none of its $800 million in assets was invested in Southeast Asia, said William Nemerever, managing director of fixed income for the Boston-based firm. The money is invested in markets such as Mexico and South America.

    "The fund has snapped back in the last few days, and even though the spread went from about 330 (basis points) to 800 (basis points), we suffered less of a loss. This fund was up over 40% in total returns this summer and even in the fall it was in the high 30s. We probably even made back a lot of the 12% we lost," he said.

    The portfolio in general has provided returns of more than 30% for the year so far, he added, in spite of the volatility.

    The $100 million emerging markets mutual fund of Rowe Price-Fleming International Inc., Baltimore, took a 10% hit in October.

    The future of emerging markets investments depends largely on how the governments in certain countries manage their financial problems, said Mike Conelius, vice president of emerging markets for Rowe Price-Fleming.

    "There are many items that need to be resolved, in several markets. If Brazil manages their tough fiscal reform, it will take the pressure off the currency," Mr. Conelius said. "But if the Brazilian government doesn't respond and there is a devaluation, there would be tremendous pressure on Argentina."

    The fallout might not be over, especially if there is another rapid downward move.

    Oechsle International Advisors invests about 10% of its $560 million fixed-income assets in emerging markets, but only in South Africa and only in rand-denominated paper. Consequently, Oechsle's investments took only a 0.5% hit. Returns for Oechsle's emerging markets investments were 8.7% in the second quarter.

    "We manage by looking to the currencies, and have stayed out of Southeast Asia," said Astrid Vogler, Oechsle's senior fixed-income manager in Frankfurt.

    "But we see the bottoming-out situation like a cleaning process. And since the currency tells you where the value is, we are starting to look at Southeast Asia now, but remain cautious."

    Debt markets did not suffer alone. The $1.5 billion active emerging markets equity investments of State Street Global Advisors, Boston, dipped 13% between end of August and end of October, said Josh Feuerman, vice president of emerging markets equity. (Returns went from 12% to -1%.) Its benchmark is the International Finance Corp. investible index, which has lost 13% for the year, Mr. Feuerman said. About 26% of SSgA's emerging equity funds are invested in Southeast Asia, he added. "The problem we're seeing in Indonesia is that the government is not taking the necessary steps to allow all the companies to go bankrupt."

    Devaluation has affected corporate earnings for companies there, but Asian executives are mum about their foreign debt exposure, he said.

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