Dr. Earl R. Smith II

By Philip Haddon | 07:00:00 | 12 January 2009

Franklin Templeton’s veteran emerging markets fund manager Mark Mobius thinks the scandal involving Satyam in India and Madoff in the US shows that regulators and corporate governance have failed everywhere.

Speaking to Citywire from Hong Kong, Mobius said that the Satyam scandal was ‘amazing,’ but emphasised that poor corporate governance is not restricted to developing regions.

‘It’s not only emerging markets, it’s global,’ he says. ‘We had Enron a few years ago and the whole banking crisis generally – it shows terrible corporate governance from everyone including the US and the UK. With Madoff, who was a respected leader in markets, it shows it really is everywhere.’

The result of the recent scandals will be closer scrutiny of companies and fund managers, he believes.

‘Better surveillance and governance will come out of it as people are up in arms,’ he says. ‘Reliable and transparent information is needed. It is a global phenomenon, not just emerging markets, and even the smartest investors in the world get caught up in it.’

‘When you see the list of investors with Madoff, you see it can happen to anyone,’ he says. ‘Everyone tries their best to be prudent, but I can understand how a lot of wealthy investors just trusted Madoff as he was prominent, well-known and respected.’

Referring to Harry Markopolos, the man who chased Madoff for years and even sent the SEC a document in 2005 entitled ‘The World’s Largest Hedge Fund is a Fraud,’ Mobius thinks the US regulator failed dramatically in its task.

‘For four years this guy was tracking Madoff, but the SEC looked and didn’t find anything. There clearly has to be much better surveillance,’ he says. ‘One of the warning signals was the fact that he didn’t have an independent clearing agency or custodian, unlike us who separate the assets from the manager. But it is the fault of everyone. People should have looked twice. We really have a regulatory problem that has to be solved; there must be unification.’

However, in the wake of the scandal surrounding Satyam Computer Services in India, Mobius is keen to emphasise that corporate governance in emerging markets is far better than some people give it credit for.

‘The good news is that it (Satyam) is the exception and not the rule,’ says Mobius. ‘The majority of companies have proper accounts and good corporate governance. Occasionally we have a bad egg in our portfolios, but we are so well diversified that when we do it does not affect us.’

Mobius runs a raft of funds at Templeton, including the firm’s Asian Growth and BRIC funds, as well as the Templeton Emerging Markets Investment Trust.

On a country basis he is currently most positive about China, Brazil and Turkey. He thinks investors need to be careful they do not miss the bottom of the market amid all the bad economic news.

‘What the market was telling us in October of last year is now coming to pass in terms of the economy coming down,’ he says. ‘I expect to see a lot of bad news in the press and people will be afraid, but in fact the market will already have bottomed and moved on. People can get blindsided by bad news in the press when the market has already bounced. Bull markets are grown on bad news. I think we are probably near the bottom in that case.’

Indeed, he points out the emerging markets index has already climbed more than 13% in the past month. The Templeton Emerging Markets fund has lost 23% in the past three years while the MSCI EM (Emerging Markets) index has lost 14%, in dollar terms.

Meanwhile Mobius’ Templeton Emerging Markets Investment Trust has returned 6.6% in the past three years, in sterling terms, while the index has risen 3.6%.

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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