Mobius on Emerging Markets: to Educate Global Investors About Closed-End Funds

Vol. IX, No. 1 A Global View of the Closed-End Fund Industry January 2009

THE SCOTT LETTER is intended Mobius on Emerging Markets: to educate global investors about closed-end funds. Closed-end Emerging Markets Expected to Grow Faster than the funds can be a valuable and profitable investment tool. To Developed Markets learn about closed-end funds, visit our web site, Once U.S. Recovers, Global Growth Will Continue www.CEFAdvisors.com, and in particular, read our article, What e interviewed Dr. Mobius by telephone economies in Asia are becoming more Are Closed-End Funds. Feel free Win Australia on December 30, 2008: domestically driven. Indeed, the services to forward this newsletter to SL: Good morning, Mark! What are you sector is gaining importance, especially in anyone who you believe could doing in Australia? China and India. Combined with govern- benefit from information on closed-end funds or Mobius: Well, it’s New Year’s eve and I ment expenditure in areas such as infra- global portfolios. am just relaxing, catching up on my reading structure as well as private and domestic here in Queensland. It’s beautiful here. consumption, this means the emerging – George Cole Scott Editor-in-Chief SL: That’s a beautiful climate this time of economies should be able to offset, at least year. Sounds like you are still in good health at partially, any decline in growth resulting 72, despite this difficult year. You still have no from slowing exports with an increased plans to retire, right? economic independence. The accumula- Mobius: That’s right. tion of foreign exchange also puts emerg- SL: I understand that you have just come ing economies in a much stronger position in from running. That’s good. I try to exercise to weather external shocks with reserves. every day as well. That keeps us going, For example, in China, those reserves total doesn’t it? I love my work and plan to more than $1,900 billion USD. continue working for a long time. Why quit? 4. Most importantly, for value investors, the Mobius: I have no plan to retire. current valuations of emerging markets SL: You wrote the following piece for The remain attractive. The benchmark MSCI Financial Times in November 2008. You said (Emerging Markets Index) is trading at a that emerging market investors should be posi- price/earnings multiple of 10.7, down from tive for the long-term: 18.5 a year earlier. This is even cheaper 1. While global growth has slowed, emerging than developed markets such as the U.S. markets are still expected to grow at a which is trading at a P/E of 16.5. Markets much faster rate than developed markets. such as Turkey and Russia are down to Predicted growth for emerging markets is single-digit P/E’s, making them especially an average of 5%, compared to the appealing. Of course, the [market] bottom expected 1% in developed markets. would be impossible to predict. However, 2. In the past, the U.S. was the largest taking a long-term view, these valuations importer of goods from Asia and other are attractive. emerging economies, but trade in emerg- We appreciate your usual clear and relevant ing market countries is now much more insights here. Now, what countries have you diversified with many exporting to new visited in the last few months and which have markets, decreasing their dependence on provided investment opportunities? the US. Today, Asia exports more to China Mobius: China is at the top, as are coun- IN THIS ISSUE: than to the U.S., which is still the largest tries related to China, such as Taiwan, and most influential economy. This U.S. Thailand and other Asian nations. We also like Mobius on Emerging influence has gradually diminished as Brazil because it is on the right track, as well Markets ...... 1 other economies continue to grow at much as South Africa and Turkey. Portfolio Manager’ faster rates. In South Africa, the macro-economic situ- Review ...... 7 3. Although the slowdown in the U.S. has ation wasn’t the greatest for a while, but now hurt Asian exports to some extent, it’s getting a lot better and is improving THE SCOTT LETTER: CLOSED-END FUND REPORT dramatically. Interest rates and inflation are Templeton Emerging Markets Fund coming down, and the retail sectors are Performance as of 12/31/2008 doing quite well. They are on the right track with a lot of resources. A new black 1-Year 5-Year 10-Year middle class is coming up, and I think they Cumulative Performance: NAV -57.22% 35.72% 109.50% will do all right despite a lot of political Cumulative Performance: Market Price -54.55% 17.94% 90.78% risks in Africa generally – but that goes Fund inception date: February 28, 1991 with the territory. We are concentrating on the consumer market such as the retailers. We like Turkey because they have unemployment benefits. They will spend SL: Was Putin behind cutting off the reached a loan agreement worth between $36.7 billion USD from the reserve fund to gas to Europe through Ukraine? $20 billion-$40 billion USD with the IMF maintain public expenditure. The Central Mobius: Yes, but they have another in December 2008. This agreement should Bank increased interest rates to ease pres- pipeline that goes further north to the help the country weather the financial sure on the ruble. Foreign exchange and North Sea to supply Europe. crisis and improve investor confidence. gold reserves remained high at about SL: That is true, but still Gazprom, a Interest rates were lowered recently to help $450 billion USD, providing the govern- state-controlled monopoly, cut off supplies the domestic economy, and transportation ment with resources to withstand the in retaliation for non-payment of its energy costs eased due to lower fuel costs. current market conditions. Lastly, the bills. This appears to be a further example However, Turkey’s future is dependent on European Union (EU) restarted suspended of the government harassing its neighbors. the economic recovery of Europe, its talks on a partnership with Russia.” [Editor’s Note: A similar shut-off in trading partner. It doesn’t help how poorly Russia is 2006 was met with near hysteria when it SL: Have you visited Eastern Europe treating Ukraine over energy supplies. caused a drop in gas pressure and spot lately and what is happening in Russia? Mobius: Russia is really trying to shortages across Western Europe. This We know that Eastern Europe has suffered become a country that is governed by the situation is happening again, although offi- under the global slowdown. My firm rule of law, but there still is a rising gap cials had claimed that gas bound for the CEFA has no exposure to this area. between rich and poor. West would flow without interruption, and Mobius: I was in Eastern Europe last SL: You might remember my Russian- Ukraine had enough gas stockpiled for the winter, which has been very cold in summer and will return later this year. We American friend, Anatoly Mikutin, who have offices in Moscow and in Poland. Europe. Source: New York Times] joined us for breakfast on July 4, 1997 SL: Russia is really in bad shape now SL: When we think of recovery in when we saw you at Hong Kong’s as its stock market has declined some 70%. Russia, we think of the oil prices. In the handover to China. He recently told me You must have had difficulty managing the last few days, oil prices recovered due to that his Russian friends say it is so expen- Templeton Russia Fund in the 2008 oil increased violence between Gaza and sive to live in Moscow now that many have price decline. Your most recent report Israel. I hope that geopolitical events are moved to St. Petersburg, which is not only shows you have about 6.1% of your assets not the sole reason for improvement in oil cheaper, but is a more beautiful place to in Templeton Emerging Markets Fund prices. What are your thoughts? (EMF:NYSE) as of August 3, 2008, prima- live. Are you aware of that situation? Mobius: That may be a factor, but the rily in energy, mining and telecommunica- Mobius: The cost of living is in supply/demand situation is such that prices tions stocks. Please update us. Moscow very high. That is changing, as will move up because the oil companies Mobius: We probably will increase it many people have moved into more are cutting their expenditures on explo- as we think that Russia will pull through. It reasonable accommodations. ration and production. Therefore, they will was hit badly by the decline in oil and gas Russia has been hit badly by the not be finding much new oil, but oil prices, but I don’t think that will last. There decline in gas and oil prices, but I think oil demands are still growing. There was a is still a rising gap between rich and poor, prices will continue to move up. Russia has “demand reduction” as a result of the but all boats have risen now. incredible reserves in the meantime. prices going much too high. SL: In December 2008, you wrote: SL: The situation will improve when We think an average price of about “The Russian government has oil prices move higher. We have read that $70-$80 USD a barrel is about right. announced measures totaling approxi- Putin has determined that he will destroy Many countries have begun to allow oil mately $185 billion USD to boost domes- the oligarchs “as a class”. Do you think prices to move up as they have been subsi- tic liquidity and corporate foreign debt to that will happen? dizing oil. By allowing the retail price to boost economic growth. In November, they Mobius: Oh, yes. That is happening. move up, you have demand destruction in revealed new proposals to support the Even in Australia, there are Russian a lot of these countries, so the stockpiles economy, including a cut in the corporate language ads on television explaining how have brought on a glut. I don’t think that profit tax rate to 20% from 24% and higher to emigrate. this can be sustained for very long.

SL: There are two closed-end funds to become wealthy. You pollute because it as continued high levels of pollution can that invest in Russia: Central European is the cheapest way of getting things done. only slow the economy further? What do Equity Fund (CEE:NYSE) and Templeton Then you realize that you are getting sick, you think of the fiscal efforts of China to Russia Fund (TRF:NYSE). We have not and customers are getting sick. However, solve its role in the global economic crisis, invested in either of these funds to-date but the clean-up also stimulates the economy. and do you think it will work? may consider them later. China is going to have to solve the Mobius: It will have an impact, but the New York Times journalist, Tom problem. Pollution control is definitely U.S. is still the largest economy in the Freidman, has just published an important going to be an element of their big spend- world. It has to recover for global growth new book, Hot, Flat, and Crowded, that ing program because the emphasis going to continue. gives his views on what he calls the forward is going to be on the consumer. SL: The former editor of The Far “Energy-Climate Era”. Have you seen it? China also realizes that it cannot Eastern Economic Review, Nayan Chanda, Mobius: No, I haven’t. depend on export-led growth but has to wrote recently this gloomy statement about SL: Friedman sees this as one of five increase domestic consumption for growth. China’s growth: key world problems in a historical epoch Part of that is ensuring that they have a safe “China has to grow a minimum of 8% that gave birth to the new era. He writes environment and safe food, eliminating per year, or it will explode because it will that there is a growing demand for ever such disastrous recent events as putting have so much unemployment and discon- scarcer energy supplies and natural melamine in milk. I think that was a wake- tent, the population will erupt. Without a resources, and a massive transfer of wealth up call. steadily rising gross domestic product, the to oil-rich countries by petro-dictators. You SL: We are glad you are aware of the ruling bargain that the Chinese Communist can relate to that. problem. Friedman reported that whenever Party has offered the people ... would Friedman continues by stating that he asks the Chinese about doing something unravel.” there has been disruptive climate changes, about pollution, the business leaders say A recent Economist article also has an energy poverty (which is sharply dividing that they will clean up when China gets excellent cover story on India and China the world into electricity haves and have- rich enough to afford the clean-up. which asks: “Can the emerging economies nots) and rapidly accelerating bio-diversity Mobius: Exactly. They have to look at now afford counter-cyclical policies such loss as plants and animals become extinct this very, very carefully as they realize that as lower interest rates and undiminished at record rates. this is something that cannot be delayed. public spending, which might offset a “How we manage these problems,” he We recently visited a paper factory where a collapse in public demand?” writes, “and if not managed properly, they woman proudly showed us how they As an economist, what do you think of could cause sweeping, nonlinear, irre- cleaned the water. She showed us a clean this assessment? versible disruptions that might affect pond after their successful efforts. Mobius: (1) I think inflation will rear multiple generations.” SL: Friedman’s argument is that China its ugly head which will have an impact. Do you think that energy demand from can get rich only if it cleans up. Unless Red (2) China has enormous foreign reserves China or India will pick up anytime soon to China becomes Green China, the and will use that as well as government affect oil prices? Communist Party leadership will not be spending, lower taxes and incentives for Mobius: Yes, this will have an impact. able to deliver to all the Chinese people the banks to lend money for houses as a way to The U.S. is still the largest economy in the promised rising standard of living. China pump up the domestic economy. world, and it has to recover for global cannot afford to do what the West did: Government spending will bring higher growth to continue at the end of the day, Grow now, clean up later. Do you agree consumer spending as they will be hiring particularly as China is going to continue with his assessment? people to build roads, bridges and infra- growing at a good pace. The number of Mobius: Yes. structure projects. cars continues to grow as everybody in SL: The web site, www.green SL: Will that bring higher inflation? China wants a car so there will be incredi- chinaview.com doesn’t address anything Mobius: Absolutely. That will happen ble demand. The power sector will about cleaning up China, as it seems to be globally, and that is why it is so important continue to need more and more gas and telling the outside world that China is for investors to be in equities at this stage. oil. I believe that coal prices will also denying reality. The site covers such It will be a defense against inflation. continue to move up. mundane issues as “Ecotourism,” “Chinese SL: There is still a lot of pessimism but SL: Freidman asks, “Can Red China Gardens” and “Painting and Wildlife”. The doesn’t an improvement in fundamentals become Green China?” He visits China sponsor of this web site is unidentified. have to follow? There seems to be a lack of regularly, and what strikes him most is that If the leadership in China doesn’t tackle confidence among investors that there will the Chinese seem to speak with greater the problem of environmental-energy- be much improvement in the investment ease and breathe with greater difficulty. climate, wouldn’t it undermine the stability climate soon. What do you think? Mobius: There is no question that is of the Communist Party? Is finding a way Mobius: Yes, everyone is talking about the case. The first objective for a country is to grow green an imperative, not an option, a very bad 2009. I beg to differ. Measures

January 2009 – 3 – (c) 2009 by THE SCOTT LETTER: CLOSED-END FUND REPORT taken by governments around the world are are somewhat overvalued. In the case of This fund has greater diversification bene- going to result in an incredible increase in many Asian currencies, that is not the case. fits than single country funds do and there- money supply, eventually causing money We believe that, as confidence returns, fore, can weather markets like we have velocity. Right now, the Federal Reserve is you will see a move toward these curren- seen. That is all upside down this year, isn’t doing everything it can to lower interest cies. Naturally, if you buy stocks in the it? How do you explain that? rates, putting money into the system by emerging markets, the currencies will Mobius: What has happened is that printing money and getting it out there. It is move up again. you have a complete retreat from equities not having any impact because the banks SL: That is a logical explanation. What into government bonds. Everything has are still not lending due to a complete lack created the boom in the last several years gone down at once because of a total lack of confidence. The fact that the Fed and was higher commodity prices, especially in of confidence in the markets. Treasury keep on changing the goal posts coal, oil and minerals. When do you think SL: That is a good reason why we try means that people are rather confused and commodity prices will improve? to avoid single country funds. We have worried. Hence, they do nothing. Investors Mobius: They have gone too far in the been very cautious in 2008 as a result by go for the safest reach and purchase U.S. other direction so commodity prices will keeping much of our cash in the closed-end Treasuries and the U.S. dollar. move up soon. Lower commodity prices bond fund, Templeton Global Income Fund SL: That gloom has to end soon. In the are a mixed blessing. It is not good for (GIM:NYSE). It is a stable fund, and we U.S., the auto companies have been offer- producing countries like Russia, but for see it as a good cash alternative. GIM ing 0% loans, and still there is little China and India, it’s good because inflation primarily invests in foreign sovereignty/ demand for cars. comes down, resulting in lower interest government bonds and also has success- Mobius: That is right. The gloom will rates which helps these economies. fully hedged foreign currencies against the not end until you get more confidence, and SL: Yes, India has a history of high falling U.S. dollar. This helped our portfo- more importantly, a move by investors as inflation. Have you been able to track the lios during these incredibly difficult flow of funds into or out of the emerging markets. We do not want to be in bond they realize that 0% Treasuries do not markets, a rather relevant factor now? funds long-term, however, we agree with make much sense. They soon will realize Mobius: Yes. Since September and you that the place to be is in emerging that buying an emerging market stock with October 2008, you have begun to see the market funds for a more rapid growth than a dividend yield of 7% that is growing at outflows (20%) of all the emerging market in the developed markets. 10%, 12% or 20% a year makes a lot more organizations. Of course, there has been a Mobius: That’s right. sense. It will take a little time, but it will 30%-40%-50% decline in these funds. This SL: You have often said that attractive come, in my view, during 2009. The pres- is more price than net outflows. More valuations will bring back bargain-hunting sure of money and lower interest rates will importantly, it is price declines. investors, but couldn’t it be different this definitely have an impact. SL: What will get the flow of funds time? SL: Isn’t the risk appetite for emerging moving again into the emerging markets? Mobius: No, we will go through the markets still pretty weak, even though we Mobius: What you will see first is same sets of cyclical investments that we are seeing some evidence of base building stabilization of price and a move-up in have seen so many times before. I think for a new bull market? price on relatively low volume. That will that this will be repeated, and we will see Mobius: Exactly. We are beginning to come primarily from domestic investors another bull market coming. see some base-building as stocks are so and partly from overseas investors like us The stock market recovery will begin cheap that it’s quite ridiculous. who are buying. Then you will get the in 2009. We will not have a huge bull SL: In your monthly update for others coming in. market overnight, but certainly a good November 2008, you wrote that most of SL: Many investors do tend to follow recovery. Many investors miss the point the recent stock market declines were due the crowd. In past years, we have talked that the economy may be in a terrible shape to “weaker emerging market currencies as about the correlation coefficient of the and anybody can be negative, but the stock investors sought refuge in U.S. Treasuries aggregate emerging markets against the market grows on this, as bull markets begin and sold their emerging market holdings.” U.S. markets being very low, so emerging in depressed economies. Isn’t much of this due to tax loss and hedge market investments reduce the volatility [Editor’s Note: The first session for fund liquidation selling which has contin- risk in a portfolio to a greater extent than the world stock markets may or may not be ued as governments ease their interest investments in other developed markets. the beginning of a new trend, but they rang rates? What do you think will turn it This is explained in your 1996 book, in 2009 with the biggest rally since 2003. around and how soon? On Emerging Markets, showing that a The Dow Jones Industrial Average rose Mobius: Again, people have sold portfolio of emerging market stocks tend to 258.3 points, its first above-9,000 closing emerging market currencies, but some of move independently of each other, more so since November 5, 2008. As the month these currencies deserve to be devalued, than a portfolio of emerging market funds, progressed, CEFA’s selection of closed-end particularly in Eastern Europe where they like Templeton Emerging Markets Fund. funds outperformed the market indicies.

These gains also held up when the stock right policies, but you have to look at its Guangdong as well. China has a very markets declined later in the month.] economic growth. vibrant retail market. SL: “The Templeton Way” is to buy at SL: I think Mr. Hickman will agree points of maximum pessimism as Sir John with you on Brazil. He sees that comparing said so many times. Bull markets climb a China’s growth rate to that of Brazil is like wall of worry. What kinds of stocks are you comparing apples and oranges as they are buying aggressively now? so different. He said that it would be very Mobius: We are buying consumer- difficult for Brazil to grow at the Chinese oriented stocks, including telecoms, retail rate without generating significant macro- and banking, as emerging market banks economic imbalances, while a 5% growth have not been impacted the way the U.S. rate is “a pretty high growth rate for Retail Mall in China and the Swiss banks have been by sub- Brazil”. Hasn’t Brazil been a big exporter prime loans. of commodities to China? SL: What has China done about land SL: Added to that is the fact that U.S. Mobius: Yes, mostly iron ore, but they ownership, particularly for the farmers money fund assets at year-end increased by will be getting lower prices for it. I believe who make up about 750 million of its $21.81 billion to $3.83 trillion. That will the Asians will lead the growth spectrum, population? create a lot of funds for investment when and the Asian consumer boom will co-op Mobius: What they have done now is the time is right. Do you see further the other economies. However, commodity to allow the farmers to rent out their land so that will have a big impact. Many of the currency devaluations among the emerging prices will take time to move back up, inefficient farms will be able to become market economies? beyond higher oil prices. more efficient by being put on larger farms. Mobius: Yes, there will be a lot of SL: Do you think that stimulative fiscal This will put cash in the hands of farmers, desire among these countries to keep their policies throughout the world will work? lowering the differences between the farms currencies weak to support exports. I don’t Mobius: It will take time for consumer in the north and those in the south. see that this will be a major problem as the sentiment to pick up, but it will work. SL: You are also bullish on India. We Chinese and others, including the U.S., Two things will happen in 2009. First, had invested in one of the India funds but have worked out a program to keep that consumer confidence has to return, and pulled out the day after the Mumbai bomb- from happening. They are on notice as this secondly, interest rates have to go to such ings. We try to avoid single country funds is not beneficial for anybody concerned. low levels that it becomes extremely because of their volatility and prefer the SL: You wrote in November 2008 that attractive to borrow. More importantly, the diversification of global and regional the Asian markets have outperformed their banks have to be able to lend when they are funds. How long do you think it will be emerging market counterparts due to their sitting on incredible amounts of reserves. before investors have enough confidence stronger financial position, stable mone- SL: You said earlier that you like to invest in India again? tary policies and easing inflation. Taiwan and Korea, but don’t these two Mobius: You put your finger right on However, we have since seen huge countries have large exports to the U.S., it. They have had bombings throughout the declines in many of the emerging markets, which have disappeared? year. The terrorists were hoping to have a haven’t we? Mobius: Yes, and that’s a problem. big impact, by hitting those big hotels full Mobius: I think you will see a lot of China is the main trading partner for of foreign investors. It didn’t work. bouncing around in these markets as so Taiwan and Korea. Korea has heavily Mumbai is thriving, and investors continue many investors are sold out, but I don’t leveraged consumers, so you have a situa- to travel to India’s financial capital and think it is anything to worry about. Base- tion where it is difficult for the government major business centers. The terrorist building is taking place, and volatility is to push up consumer spending. The Korean attacks haven’t lowered the confidence of quite remarkable. This tells you one thing. government also made a big mistake in investors in India. Tourism is hurt, but it There are people out there who are buying [creating] measures that killed its housing will recover. and selling on relatively low volumes. market. Now, they are trying to reverse SL: There are quite a few problems that SL: Matthew Hickman, the portfolio that, and to the extent that they are success- have been reported about India, such as the manager for the Latin America Equity ful, it will be quite positive. But it will take lack of infrastructure, high poverty levels, Fund (LAQ:NYSE) whom we intere- time. China’s recovery will help Korea. polluted rivers and a political system that viewed last month, feels that many of these SL: I understand that China holds trade makes it difficult to get things done (unlike markets, particularly Brazil, will recover fairs every year. Have you attended any of the situation in China where things are faster than the others. Do you agree with them and do they help their economy? mandated). In the Republic of India, the that assessment? Mobius: They are planning one in multi-party federal republic has a demo- Mobius: I am not so sure about that. 2010 in Shanghai which will be a very big cratic system that drags on forever before Brazil is doing fine as it has followed the event. There will be smaller ones in decisions are made. We wonder where the

January 2009 – 5 – (c) 2009 by THE SCOTT LETTER: CLOSED-END FUND REPORT growth is, and how much confidence there better markets are really coming. Are you SL: One last question, do you think the is to invest in India. convinced? new U.S. president will be able to solve Mobius: The growth is there. India has Mobius: Oh, yes. some of the world problems? a very dynamic industrial and service base SL: If you are convinced, so are we. Mobius: I think Obama will be (unique in that it has many different spoken Now it’s time to summarize. successful in the short run, but these prob- and written languages). There are more Mobius: The global economies will lems have gone on for generations. Muslims in India than in Pakistan. With slow down in 2009. The pessimism in the SL: Where are you going next? this, they will get it together, so I think world is much greater than it has been in a Mobius: I have to be in Thailand next India will succeed. long time, but with interest rates coming week as we have investments there. As they move forward, they will get a down, it is only a matter of time before you SL: Thank you for your time. This is much more peaceful environment. It will see money going into the equity depends on what happens in Pakistan. markets around the world, including the extremely important and valuable informa- Pakistan will cooperate; India is in the emerging markets. tion; we will stay in touch. control of civilians. These markets have not lost the funda- Editor’s Note: Our clients have expo- In Pakistan, it is the other way around. mental appeal that they have had in a long sure to India through EMF, but we do not The military is more powerful so there has time, and that is growth. China will lead plan to invest in the India Fund any time to be some accommodations. That will take the way followed by India and Russia. soon. time, but I have no doubt that the new U.S. administration will make efforts to keep JOSEPH MARK MOBIUS was born to German and Puerto-Rican parents in Hempstead, New York. He earned his Bachelor of Fine Arts and Master of peace between these two countries because Science in Communications from Boston University, and received his Ph.D. in it is so vital in the fight against terrorism. Economics from MIT in 1964. His other credentials include a degree in This is despite the sorry state of India’s Clinical Psychology from the University of New Mexico. weak infrastructure, especially its roads. He joined Templeton in 1987 as president of the Templeton Emerging Markets There is also little improvement in raising Fund (EMF:NYSE), the first emerging market equity fund available to U.S. the people out of poverty. Tourism has also investors. He integrated his knowledge of new international markets with Sir slowed due to the global slowdown and John Templeton's disciplined, long-term approach to investing. Mobius’ one key condition to taking on this challenge was that Templeton had to open its first emerging market office, which fears of more terrorism. it did in Hong Kong. SL: We note that the Mumbai stock index began in 2008 with a strong rally His current duties include managing $37 billion USD in more than 35 closed-end and open-end mutual funds worldwide, including 13 offices overseas. His closed-end equity funds are his after a major bank cut its interest and pioneering Templeton Emerging Markets Fund (EMF:NYSE) and the Templeton Dragon Fund deposit rates by half a percentage point, (TDF:NYSE), which covers the Greater China region. following similar rate reductions by its Because of his in-depth knowledge of emerging markets, Mobius has been a key figure in devel- state-owned peers. Resource stocks also oping international policy for emerging markets. In 1999, he was selected to serve on the World jumped after crude oil prices rose Bank's Global Corporate Governance Forum as a member of the Private Sector Advisory Group overnight, and the markets rallied all over and as co-chair of the Investor Responsibility Task Force. He has also been featured as a speaker for the World Bank (1999) and the London Speaker Bureau. Mobius gives seminars to the world in early January 2009. We still many other groups, including the Asian Development Bank (2002). have to be completely convinced that Mark Mobius: What Bear Markets Have Taught Me r. Mark Mobius shares what he has rising market. In this report, bear markets However, an analysis of the historical Dlearned about bear markets after 40 refer to a price decline of 20% or more numbers shows this to be true. In studying years of investing: over a one-month period. all the bull and bear markets since 1988, • Bear markets are shorter in duration “The most important thing I’ve learned we have discovered that, on average, a bull than bull markets in the last 40 years of investing is that bear market lasts 22 months while bear markets • Bear markets fall less than bull markets markets are shorter in duration than bull last six months. Moreover, the average rise (in percentage terms) markets. Also, in percentage terms, bear return of bull markets was +113% while • Buy at times of maximum pessimism markets go down less than bull markets go bear markets have averaged a 32% fall. • Sell at times of maximum optimism up. “Since the beginning of 1988, the “I know that many find this hard to longest bear market we’ve seen in the What Are Bear and Bull Markets? believe since, from a psychological point Emerging Markets Index declined 49% in A bear market is a sustained falling of view, good times seem to end rather U.S. dollar terms. In contrast, the longest market, while a bull market is a sustained quickly, while sorrows seem to last forever. bull market lasted for 17 months, when the

MSCI Emerging Markets (December 1990 Take Advantage of and November 1994) returned a whopping Buying Opportunities GEORGE COLE SCOTT +251% in U.S. dollar terms. When is it most possible to buy quality, Founder and Editor-in-Chief The Best Time to Invest but cheap, stocks? It’s when everyone else Portfolio Manager is selling and probably despondently Mobius replies, “No one is able to selling. In many cases, the prices of funda- LESLIE JANE DANIELS accurately predict the onset or end of bull Copy Editor mentally sound stocks decline due poor and bear markets consistently. Therefore, market sentiment or low investor confi- when anyone asks me when to invest in the JOHN COLE SCOTT dence rather than due to deterioration in stock market, my answer is: ‘When you Circulation Manager company fundamentals. Also, a stock is have money.’ sometimes beaten to levels which already “Given the historical evidence in favor MAMIE WOO MCNEAL take into account the risks associated with of bull markets, there is a good chance of Production Editor the company. Investors should always succeeding if we are invested rather than if maintain a long-term view and be ready to we are not. Investing means investigating take advantage of these opportunities. companies’ balance sheets and profit and The reverse also stands true – the best loss statements, and management will time to sell a stock is when everyone enable us to uncover investment bargains. around you is rushing to get into the “The proven method of succeeding in market. If a market is at its height of its stock market investing, safely, over many popularity, prices are likely to be at their years means value investing. Value peak too. investors have been able to earn substantial Currently, markets around the world long-term returns, since they buy when are substantially down, and we are proba- stocks are cheap, or undervalued, and bly reaching levels of maximum select stocks in companies that have strong pessimism. balance sheets, good profitability and the Source: Franklin/Templeton Investments: ability to generate consistent earnings. Market Update, October 10, 2008 Portfolio Manager’s Review The Scott Letter Online n December, the emphasis was on which dropped the share price by the is published by Ifinding funds that we expect to recover amount of the distribution. Shares of the the fastest in 2009. India Fund were sold after the Mumbai Closed-End Fund Advisors At year-end, we purchased the most attacks and probably will not be repur- Global Investment Counsel P. O. Box 1100 undervalued funds including Alpine Global chased any time soon. Premier Properties Fund and Bancroft Richmond, Virginia 23218 We have not been rebalancing our (800) 356-3508 Convertible Fund (switching out of its accounts in the last few months so we www.CEFAdvisors.com sister fund, Ellsworth Fund). We also could stress the defensive nature of the increased our exposure to the healthcare Currently offering managed portfolios funds that have been acting well over strict industry as these funds have been acting with the following objectives: asset allocation. We expect to re-balance well and to Latin America due to the opti- Global Hybrid Income later in 2009. Our cash levels (as of mism for recovery there. Globally Balanced December 31, 2008) are over 13%. In the bond fund allocation, we added Globally Diversified Growth & Income to the Templeton Emerging Market Income Looking forward, we are cautiously Globally Diversified Growth International & REIT Fund and Templeton Global Income Fund, optimistic that the markets will do well in where appropriate. Because of the defen- 2009. To take advantage of new opportuni- sive nature of these bond funds, allocations ties, we plan to put our cash back to work there will be emphasized until the invest- when the prices are right. There are many ment climate improves. bargains in the emerging markets as To pay for these purchases, we sold expressed by Mark Mobius. most of our positions in Asia Pacific Fund just before it declared a $5.00 distribution,

Disclaimer: None of the information contained herein should be constructed as an offer to buy or sell securities or as recommendations. Performance results shown should, under no circumstances, be construed as an indication of future performance. Data, while obtained from sources we believe to be reliable, cannot be guaranteed. Use or reproduction of any or all of The Scott Letter: Closed-End Fund Report requires written permission from Closed-End Fund Advisors. All rights reserved. (c) 2009 by