For American fund companies looking to offer investors international flair, the emerging markets provide a world of opportunity.

At a recent conference here on the globalization of mutual funds, executives from U.S. and European fund firms discussed the risks and rewards of investing in the so-called emerging markets-defined by the world bank as countries with a gross national product of less than $9,385 per person. They offered a closer look at the opportunities and pitfalls of investing in three markets in particular-Southern Africa, Indonesia, and Russia.

While each speaker was quick to point out that the emerging markets can be extremely volatile and fraught with political and economic risk, they all made a strong case for investing in the developing world. Among the most compelling arguments is the belief that the world's developed nations are overextended and growing slowly.

"Some of the newest markets, dangerous as they are, give you the best returns," said Arnab Banerji, chief investment officer at Foreign and Colonial Management Ltd., London.

The economies of the world's 24 developed nations are expected to grow 2% to 3% annually between 1996 and 2005, Gregory E. McGowan, executive vice president and general counsel for Templeton Worldwide Inc., told the crowd.But the world's 71 developing nations will log an economic growth rate of 6% to 8%, he said.

Similarly, the emerging markets are expected to account for 20% to 25% of the world's market capitalization in the year-2000, up from 11.3% in 1996, Mr. McGowan said.

As the executive responsible for all of Templeton's business outside of North America, Mr. McGowan is no stranger to emerging markets. The San Mateo, Calif.-based fund company has more than $10 billion invested in developing economies and launched its first emerging-markets mutual fund in 1987, he said.

Today, Mr. McGowan is clearly bullish on Russia. In September 1995, the Templeton Russia Fund made its debut with a price per share of $15.63. After reaching a high of $53 per share in July 1997, the fund was trading at $36.63 per share on March 30, 1998.

In addition to offering Russian investments to its clients around the world, Templeton opened its own asset management firm in the country in 1996. Russia's nascent mutual fund market has 17 open-end funds offered by 11 asset management companies.

While these funds only have $45 million under management, Mr. McGowan pointed out that "the U.S. started that way too."

For investors, Russia has much to recommend it, Mr. McGowan said. It is the largest country in the world in terms of area, spanning more than 11 time zones. Its population of 150 million is extremely well-educated-a fact Mr. McGowan said he learned first-hand when staffing Templeton's Russian asset management firm.

Moreover, 75% of the economy has been privatized and a viable infrastructure for stock and currency markets has been developed, Mr. McGowan said.

But pitfalls abound, he cautioned. For one thing, the health of president Boris Yelstin, who has been a driving force behind the country's new market-oriented policies, is uncertain. Russia has also been unable to enforce its tax collection laws and has had some problems assuring shareholder rights.

Another market that offers opportunity and risk to both U.S. fund companies and investors is Southern Africa, said Mark Breedon, a senior vice president for Alliance Capital Management and portfolio manager of its Southern Africa Fund.

"South Africa is not the Wild West of investing," Mr. Breedon said. "What it needs is our capital."

Currently, Southern Africa is experiencing slow growth and money in the region is tight, Mr. Breedon said. But "we're looking forward to a growth environment that will be good for investors," he added. Inflation is quickly falling; interest rates are declining; and controls on imports and foreign exchange are eroding, he said. In addition, the monolithic companies that have long dominated the area's economy are beginning to break up.

The region is also ready to spawn its own mutual fund industry. The British that colonized the area left a developed infrastructure for investing, including a functioning stock market, custodians and banks, and a culture that encourages savings, Mr. Breedon said.

The primary savings and investing vehicle in Southern Africa has been life insurance, Mr. Breedon said. But mutual funds are catching on.

"Investors are waking up to the fact that the life insurance groups are giving them terrible returns," Mr. Breedon said. "Mutual funds arebeginning to latch on to the existing distribution systems" and are becoming a more popular choice for investors.

"Our opportunity is that capitalists are welcome invaders,"Mr. Breedon added. "There's a recognition that new talent must be brought in and U.S. firms can provide that."

But not all emerging markets are so bright. The meteoric rise and rapid demise of the domestic mutual fund industry in Indonesia provides a cautionary tale of how the outlook for an emerging market can change dramatically overnight.

"This year is going to be a very, very bad year" for Indonesia, said Leilani Sanders Hall, a senior vice president for Pioneer Group's Asian business development group in Singapore.

That was not the case in 1995, when, to promote local investor strength, Indonesia's parliament passed a law allowing for the establishment of mutual funds by domestic investment managers.

The fledgling industry grew quickly, fueled in part by tax laws that favored fixed-income investments over other savings vehicles, such as bank deposits. By December 1996, there were 25 registered funds with 2.7 trillion rupiah under management in Indonesia, Ms. Sanders Hall said. Eight months later, assets under management ballooned to 8.3 trillion rupiah.

While initially designed to attract retail investors, many of the country's funds were buoyed by banks, which, by August 1997, had put 3.1 trillion rupiahs into the Indonesian fund market. That turned into a huge problem when an economic crisis hit the country that summer and caused the rupiah's value to plunge.

Investors in Indonesian mutual funds rushed to redeem their shares. But the majority of the funds were not well capitalized and had invested in bonds, which were highly illiquid. Many of the fund management companies turned to banks for relief, but they, too, were illiquid.

By February of this year, they were down to 4.1 trillion rupiah.

"The market tested the regulations and found their weaknesses," Ms. Sanders Hall said. "Funds performed well until the summer of 1997." u

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