Just call them reemerging markets

If 1999 was such a good year for emerging markets, why aren’t Joe Williams and managers like him beside themselves with glee?

Because while major recoveries in Latin America and Asia gave their funds the positive returns absent for two years, money hasn’t returned. And some believe that the extent of the comeback would have been even greater had foreign investors put up more cash.

The recession that the ailing Thai baht touched off in the summer of 1997 soured most investors on emerging markets. Banking reform in Japan, a technology explosion in India and stabilizing currencies in parts of Latin America have done little to woo them back. What’s more, Americans have found plenty of high-octane opportunities on their own turf.

“There’s basically skepticism on the part of investors that this recovery is for real,” says Mr. Williams, director of emerging markets investing with Batterymarch Asset Management in Boston. “For investors, this year isn’t enough to offset the experience of the volatility.”

101% return, little new money

His firm runs its parent’s $100 million Legg Mason Emerging Markets Fund, and he hasn’t seen much money coming in this year, despite 101.51% returns.

Emerging markets funds have posted some impressive numbers. The average one had a 69.75% return in 1999, according to Lipper Inc. of New York, compared with a 28.69% return for the average domestic stock fund in the same period.

Through the first 11 months of 1999, emerging markets funds attracted just $688 million, according to Financial Research Corp. of Boston. That was a reversal of the $654 million outflows suffered in 1998 but nowhere near the $4.9 billion that came into the funds in 1997, FRC reports.

Most investors still aren’t biting.

“Clients got beaten up pretty good a couple of years in a row so a lot aren’t interested,” says Lou Stanasolovich, president of Legend Financial Advisors. He moved clients out of developing countries almost 18 months ago.

Instead, the Pittsburgh planner places client money in global mutual funds that have a small amount of emerging markets exposure.

In any other category, this level of performance would attract so much money that even the most experienced portfolio manager would wonder how to spend it all. But investors have found enough action closer to home.

“It’s hard to compete with the Internet funds,” says Chris Matyszewski, who manages the $80 million emerging markets fund of Pittsburgh’s Federated Investors from New York. “Shareholders are saying `We’re getting the same kind of performance at home without the risk premium.’ ”

Mr. Stanasolovich echoes that view. Clients aren’t clamoring for the eye-popping returns of emerging markets, he says, but for technology plays.

For his part, Mr. Matyszewski says his fund hasn’t taken in much money, but he hasn’t seen many redemptions either. It nearly doubled in size in 1999, mostly as a result of appreciation, finishing the year up 79.08%.

Both Mr. Williams and Mr. Matyszewski say that the recoveries would have been more dramatic if investors had chased performance the way they usually do. Instead, investors in the countries themselves have stepped up to the plate to fuel some of the comebacks, giving Mr. Williams hope that they are sustainable.

from bonds to stocks

“The interesting thing about a place like Brazil is that the interest rates have come down so much that local investors have taken the money out of bonds and put it into the stock market,” Mr. Williams says by way of illustration.

Similarly in Turkey, where the government is battling triple-digit inflation, stocks have started looking like a viable option.

“Then there’s Greece,” says Mr. Williams; though every institutional investor is negative on the country, “the market has gone up 50% on the backs of local investors.”

Even if they may want additional money to come into their funds, both Mr. Williams and Mr. Matyszewski say they expect that the emerging markets heyday is a thing of the past.

“Talking to investors, it’s clear they’re interested,” Mr. Matyszewski says, “but once bitten, twice shy.”