A Financial Pioneer in Developing Countries

Discuss investment strategy with fund manager Mark Madden and before long phrases like "underperforming," "black clouds," and market "bottom" are bound to come up.

But this gloomy-sounding language doesn't refer to his outlook (he's actually quite optimistic). Rather it describes situations he seeks out.

As head of Pioneer's Emerging Markets Fund, Mr. Madden has taken the contrarian approach: He ignores "hot" stocks and concentrates on finding bargains in places some money managers shun, like Russia, Mexico, and South Korea.

"We see all the same black clouds that everyone else sees, and I can tell you we have sweaty palms when we go in and start buying in some of these countries," Madden says in an interview at Pioneer's headquarters in Boston.

"But ... if you're going to buy stocks cheaply, you have to look beyond the black clouds ... and say 'Are there bigger storm clouds beyond them, or is there sunshine?' That's basically our analysis every time."

By sticking to the "buy low, sell high" road, Madden has kept his load fund in the top quarter of emerging-market funds for two years in a row. No small feat considering 1995 was rough for developing nations after the Mexican peso was devalued at the end of 1994. The average fund finished slightly in the red in '95; Madden stayed a few points on the positive side.

Growing assets

The news was better in 1996. The 2-1/2-year-old fund returned a respectable 17.8 percent, well above the 11.2 percent average return for diversified emerging markets funds, according to Lipper Analytical Services in New York.

That performance hasn't gone unnoticed. The fund's assets quadrupled in 1996: from $25 million in January to $106 million by year end. Emerging-market funds in general saw assets surge 64 percent, as investors funneled $4.5 billion into them through November. Madden attributes the fund's asset growth to investors realizing "that the US market doesn't have a lot of upside steam left to it."

Given that the US constitutes at most a quarter of the world's market capitalization, "there's a world of opportunity out there that most people today are still missing," Madden says.

He suggests that people should invest in emerging markets for two reasons:

"You have higher-growth economies and companies [that], despite higher volatility, will produce superior returns" over the long run.

"These markets are very inefficient," meaning savvy investors can find bargains on stocks.

Madden takes advantage of the opportunities by moving in and out of investments quickly. His turnover rate, or the rate at which he changes the holdings in his portfolio, was a hefty 250 percent in 1995 and about 140 percent in 1996.

He has a "more active management strategy than other international managers," says analyst Abhay Deshpande, who follows the fund for Morningstar Inc., the Chicago mutual-fund tracker. But the typical emerging-market fund also has high turnover - an average of 100 percent in 1996, according to Morningstar.

Advisers often warn investors against funds with high turnover rates, because they incur higher transaction costs that eat into returns. But Mr. Deshpande says Madden has been an exception. "He's used his high-turnover strategy to benefit shareholders. It's just unusual to see that."

In Madden's view, as long as these markets remain so volatile, a manager can't be afraid of the cost of moving money around. "When you've had a market that's run dramatically, like up 150 percent, it's well worth your while to incur the 2 to 5 percent cost" to get out, he says.

In 1996, Madden pulled out of Russia and Eastern Europe, where markets rallied "fairly dramatically," and bought into Latin America and Asia, strengthening the fund's position in those regions.

As of Jan. 1, the fund was invested in 18 countries, weighted most heavily in Brazil, Mexico, Israel, Korea, and Argentina. Its top industries were financial services, utilities, and capital goods. The fund holds more than 100 stocks.

In addition to "top-down" analysis of countries, Madden does "bottom-up" research of individual stocks. He calls his approach "disciplined value" investing. The key is not to be "stupidly" contrarian, he says. "You don't just go in and buy because everybody is selling. Rather you assess the situation" to see if they are selling because of permanent or temporary factors.

An emerging interest

Stock analysis comes easily to Madden, who worked as an investment banker and then as an analyst of US companies when he joined Pioneer in 1990. He warmed up to emerging markets when he was asked to help set up Pioneer's operation in Poland. This asset class, he realized, "is not a fad. It is here to stay, and it is going to grow tremendously in the coming years."

Emerging markets account for 12 percent of the world's market capitalization now, but Madden estimates that figure will grow to 20 percent by 2000. His optimism is apparent in another way: All his retirement money is invested in his fund.

Experts say emerging-market funds are for aggressive investors who have horizons of at least three to five years and who are aware of the risks of such unpredictable variables as foreign currency fluctuations and changing politics. Madden maintains that share-price volatility in these markets is not all that much higher than it is for US growth stocks.

He is also bullish on emerging markets for the future. He says a huge correction in the US market could hurt global markets in the near-term, but still thinks that some emerging markets have a lot of growth potential and could offer better returns than the US market. "I think '97 and '98 are going to be some big years for emerging markets," he says.