How to Invest During an Economic Crisis

Take some lessons from the Asian meltdown in the late 1990s: Those who stayed the course fared best.

By Richard Widows July 23, 2008

provided by

Article Tools

T | T

TEXT SIZE:
print

E-Mail

Add to My Bookmarks

Adds Article to your Entrepreneur Assist Bookmark page.

Those who say "this time it's different" in describing the current financial turmoil could use a reminder that, a mere decade ago, a surprisingly similar situation existed.

A good lesson for investors to bear in mind is that those who kept faith in the markets during the crisis were extremely well rewarded.

Assuming the U.S. economy recovers from its current lapse, as it always has in the past, similar rewards are possible for those who brave the prevailing negativity and stick with the long side of the stock market.

The current crisis bears remarkable similarities to the Asian economic crash that started 11 years ago this month -- first a devaluation of the Thai currency, then a major collapse of markets and currencies throughout East Asia. Yet, those who bought mutual funds with holdings in that region 10 years ago, when the outlook in that region seemed bleak, experienced explosive growth over the subsequent decade.

Content Continues Below

Funds that have quadrupled or better in the 10 years since the depths of the "Asian contagion" are summarized in the accompanying table. A second list shows some beaten down funds that optimists might consider in these uncertain financial times.

The current U.S. slump is remarkably similar in many ways to the Asian collapse that began in 1997, as can be seen from these descriptions of the Asian situation by the Federal Reserve Bank of San Francisco and the U.S. Congressional Research Service:

It was an "unprecedented financial crisis" caused in part by a "classic financial panic."

"Disruptions in bank and borrower balance sheets have led to wide bankruptcies and interruption of credit flows."

The economic shocks were "what some describe as 'runs' on financial systems and currencies."

A major weakness was "lack of incentives for effective risk management."

The crisis was "created by implicit or explicit government guarantees against failure."

"Events were accompanied by pressures in the foreign exchange market."

A major political figure attacked "rogue speculators" as contributing to the problems.

The collapse of a major investment firm exacerbated the crisis.

Short-term debt held by financial firms was converted to government-backed loans in an effort to remedy their problems.

Those who braved the uncertainty of the Asian turmoil of a decade ago and acquired mutual funds focusing on that region have been handsomely rewarded. Of 66 Asian and Pacific region funds with performance histories of at least 10 years tracked by TheStreet.com Ratings, the average fund has nearly quadrupled over the past years, up a cumulative 277.50% for the period. That's more than eight times the aggregate return of 32.9% for the S&P 500 total-return index over the period.

On an annualized basis, the return for the average Asia/Pacific region fund over the decade since the East Asian crash has been 12.7% vs. 2.88% for the S&P 500 total return benchmark.

The accompanying table shows a sampling of funds invested in the hardest-hit East Asian countries of Thailand, Indonesia, Korea, Malaysia, Taiwan, Singapore and Hong Kong.

Besides returns from rebounding stock prices, U.S. investors who braved the Asian contagion were rewarded when the Asian currencies recovered from panic levels and then steadily appreciated against the greenback over the past decade.

MANY INVESTORS WHO BRAVED THE "ASIAN CONTAGION" 10 YEARS AGO WERE RICHLY REWARDED
FUND NAME	TICKER	TheStreet.com RATINGS GRADE	TYPE OF FUND	10-YR. ANN'L TOTAL RET'N (%)	10-YR. CUMULATIVE TOTAL RET'N (%)
Matthews Korea Fund	MAKOX	C	Open-End	25.73	886.88
Korea Fund	KF	D	Closed-End	23.09	698.25
Templeton Dragon Fund	TDF	B-	Closed-End	20.39	539.62
Matthews Pacific Tiger Fund	MAPTX	B-	Open-End	20.12	525.65
DFA Asia Pacif Smal Comp Port	DFRSX	A-	Open-End	20.02	519.96
Greater China Fund	GCH	C-	Closed-End	19.91	514.32
Templeton China World A	TCWAX	B-	Open-End	19.31	484.53
Matthews Asian Growth & Income Fd	MACSX	A	Open-End	18.45	443.67
Fidelity Southeast Asia Fund	FSEAX	C+	Open-End	17.81	414.83
Allianz NACM Pacific Rim A	PPRAX	B	Open-End	17.35	395.19
Asia Pacific Fund	APB	C+	Closed-End	16.71	368.92
AllianceBern Greater China 97 A	GCHAX	C+	Open-End	16.40	356.61
Guinness Atkinson China & HK Fund	ICHKX	C+	Open-End	15.84	335.00
TCW Asia Pacific Equities I	TGAPX	C+	Open-End	15.81	333.80
T. Rowe Price New Asia Fd	PRASX	C	Open-End	15.52	323.21
Pacific Capital New Asia Gr A	PNAAX	B	Open-End	15.21	312.12
iShares MSCI Malaysia	EWM	B+	ETF	15.11	308.45
Korea Equity Fund	KEF	C+	Closed-End	14.92	301.72
Avg. of 66 Asian & Asia/Pacific Funds *				12.67	277.49
S&P 500 Total Return Index				2.88	32.85
* Only selected funds displayed in table from 66 Asian & Asian/Pacific funds with 10 years of performance history. Source: TheStreet.com Ratings - Data as of 6/30/2007. For an explanation of our ratings, click here.

At this point, no one really has a clue as to when the domestic market finally will look beyond the current economic malaise and start to move broadly higher. But assuming a new bull market will eventually emerge, the funds on the adjoining table of beaten-up "buy-rated" funds are worth considering. They all sport grades in the "A" and "B" ranges from TheStreet.com Ratings, which equate to "buy" recommendations.

Each of the open-end, closed end and exchange-traded funds on the list has suffered a loss of more than 15% over the past year -- ground that it is hoped they will all quickly recover in a broad market advance.

The funds on the "beaten-up" list represent a diversified selection, with six members focusing on investments outside the United States, two funds with worldwide (domestic and foreign) investment horizons, three small cap funds, two equity income specialists, a growth fund and a growth and income portfolio.

The list includes the venerable closed-end Zweig Fund (ZF), which has surrendered 16.31% over the past year but has bucked the downtrend more recently with a three-month advance of 3.32%.

Its largest holdings include Halliburton (HAL), ConocoPhillips (COP), Freeport-McMoRan Copper & Gold (FCR) and Gilead Sciences (GILD).

Although it has skidded 19.05% in the past 12 months, including a slide of 7.07% in this year's second quarter, the closed-end Boulder Growth & Income Fund (BIF) lists among its top holdings such stalwarts as Berkshire Hathaway (BRK.A), Wal-Mart Stores (WMT) and soon-to-be-acquired Anheuser Busch (BUD).

BIF ended the first half of 2008 quoted at a modest 0.14% premium over its net asset value per share, making it the only closed-end or exchange-traded fund on the list priced above NAV. That was in strong contrast to the closed-end Eaton Vance Tax Advantage Dividend Income Fund (EVT), which at the end of June was selling at a discount of 13.90% from its NAV.

EVT, which is 28.5% in the still-shaky financial sector, has as top holdings AT&T (T), Chevron (CVX) and Marathon Oil (MRO).

BEATEN-UP "BUY RATED" FUNDS: CANDIDATES FOR LONG-TERM COMEBACKS?
NAME, TICKER & TheStreet.com RATINGS GRADES	TYPE OF FUND	OBJECTIVE	3-MO. TOTAL RET'N (%)	YR-TO-DATE TOTAL RET'N (%)	12-MO. TOTAL RET'N (%)
MVC Capital (MVC) B+	Closed-End	Growth	-9.48	-14.53	-24.95
iShares MSCI Sweden (EWD) B	ETF	Non-US Equity	-10.60	-12.46	-22.74
Boulder Growth&Income Fund (BIF) B	Closed-End	Growth & Inc.	-7.07	-16.12	-19.05
First Focus International Eq Inst (FFITX) B+	Open-End	Non-US Equity	-3.17	-14.01	-16.37
Zweig Fund (ZF) B-	Closed-End	Equity Income	3.32	-3.16	-16.31
BlackRock S&P Qual Rkg Glob Eq Mgd (BQY) B-	Closed-End	Global Equity	-5.00	-13.13	-16.22
Aston River Road Sm Cap Val (ARSVX) B+ *	Open-End	Small Cap	0.08	-5.66	-16.17
iShares MSCI Italy (EWI) B-	ETF	Non-US Equity	-5.19	-14.95	-16.15
Artisan International Val Inv (ARTKX) B *	Open-End	Non-US Equity	-5.54	-10.54	-15.89
Eaton Vance Tax Adv Glob Div Inc (ETG) A-	Closed-End	Global Equity	-1.04	-16.98	-15.89
Royce Value Plus Fd Svc (RYVPX) B-	Open-End	Small Cap	2.09	-7.82	-15.62
Accessor Fd-Intl Equity Inv (AIINX) B-	Open-End	Non-US Equity	-2.01	-13.66	-15.61
Eaton Vance Tax Advantage Div Inc (EVT) B+	Closed-End	Equity Income	1.29	-14.08	-15.59
Forward Intl Small Comp Eq A (FFIAX) B **	Open-End	Non-US Equity	-2.58	-10.03	-15.30
Pacific Advisors Small Cap A (PASMX) B+ **	Open-End	Small Cap	4.06	-4.07	-15.06
* Closed to new investors. ** Max. front-end sales charge of 5.75% (no front-ene charge for other open-end funds in table). Source: TheStreet.com Ratings - Data as of 6/30/2007. For an explanation of our ratings, click here.

The author has a long-term position in the Korea Fund.