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Funds Bet on Turnaround in Asia

Rothschild of New York and Acadian Asset Management of Boston have come out with two bold new mutual funds, given the economic upheaval in the Pacific Rim. Rothschild's new fund, the Asian Recovery Fund and Acadian Asset's fund, the Pegasus Asian Opportunities Fund are being introduced on the bet that the Asian economies will recover any day now.

Even though Japanese stocks are valued at less than half of what they were ten years ago and export-led growth in the region is beginning to look promising, most mutual fund companies still do not think now is a good time to step in with a recovery, or vulture' fund. Rather, most mutual funds are afraid deep structural problems in the Pacific Rim economies will delay recovery. And now that the central banks in Asia have reduced prime interest rates, there is the additional fear of deflation.

The Rothschild Asian Recovery Fund, introduced earlier this month, aims to invest a total of $300 million in Asian companies in, or emerging from, bankruptcy. The fund will invest in these companies primarily through distressed bank loans or other private or public debt securities. The California Public Employee's Retirement System (Calpers) has pledged $100 million to the fund.

Calpers' contrarian view is critical to the mutual fund industry because with more than $153 billion of assets under management, Calpers' movements are carefully followed and often mimicked by institutional investors.

Rothschild's new Asian Recovery Fund is "timely" and opportune, because it will allow Calpers to purchase "securities at historically low prices," said Charles Valdes, the chairman of Calpers' investment committee, in a news release. Calpers' board was also interested in this new fund because it was looking for international exposure, said Brad Pacheco, a Calpers spokesperson.

Calpers is comfortable putting its faith in Rothschild because the pension fund invested $50 million in Rothschild's Recovery Fund in 1998 and "has enjoyed a good track record with other Rothschild funds in the past," said Pacheco. Calpers is also willing to ride out present stresses in the Asian market for the long-term.

"It's mostly six or seven years before you see a result in a mutual fund, so we are not worried about that yet," Pacheco said.

Like Rothschild, Acadian's new Asian Opportunities Fund, introduced last week, will focus on economic restructuring, including re-capitalizations, debt buyouts, debt/equity swaps, management buy-outs, strategic takeovers, institutional portfolio buyouts and traditional direct investment. United Asset Management, Acadian's parent company, will co-invest in the new fund. Acadian declined to disclose the size of that investment.

Acadian said in a statement that it expects institutional investors which invest directly in companies in Asia will also be investing in re-capitalizations and re-structurings of public companies.

Bill Rocco, a Morningstar international analyst who focuses on Asia, has not heard of any other funds betting on a turn-around in Asia. But, with Calpers involved, other fund companies or investment banks may soon follow suit with their own version of an Asian turnaround fund, he said. And, if they do, they will probably be acting wisely, he said.

"As an institutional fund managed by professionals capable of sifting through data to determine which distressed companies are set for a turnaround, [the Rothschild and Acadian funds] make sense," said Rocco. "There are a lot of distressed companies in Asia, and if you pick the right ones, you could make a lot of money."

Daiwa Securities of Tokyo, which will serve as a partner with Rothschild on the Asian Recovery Fund, will help evaluate companies in the region and assist on legal issues, said Rothschild.

For its part, Acadian is partnering with Pegasus Capital, a regional financial services company based in Singapore, which will manage the fund. However, Acadian will also open its own office in Singapore.

CDA/Wiesenberger and Lipper confirmed that the Rothschild Asian Recovery Fund and Pegasus Asian Opportunity Fund are unique in that they are concentrating on bankrupt firms and re-capitalizations.

These new funds will have to beat a track record in Asia that has been abysmal of late. Other Asian funds formed in the past few months which take a more traditional, general investment approach have performed terribly.

Eighteen new Asian funds were introduced in 1998, eight of which had negative returns, according to CDA/Wiesenberger. In fact, these 18 new Asian funds have posted a cumulative negative return of 74.93 since their inception. The worst performer was the Ivy China Region Fund, which dropped 47.67 percent in value. Even the best performer, the Worldwide Hong Kong Index, rose by only +13.80 percent.

Many funds concentrating on emerging markets in Asia and elsewhere have liquidated altogether. These include the Robertson Stephens Developing Country Fund, the Van Eck Emerging Markets Growth Fund and the Citifunds Emerging Asian Markets Fund (MFMN, October 12, 1998).

Rocco, of Morningstar, said that by focusing only on bankrupt firms, Rothschild's new Asian Recovery Fund could pick up some highly undervalued stocks.

But it is still a gamble, Rocco said. And he wondered why the new Rothschild fund is betting on bankrupt firms when there are many companies whose stock is cheap but which are not bankrupt.

"Why limit yourself only to those in distress when there are so many other bargains?" Rocco said.