• EQUITY FUND OUTLOOK -- Thurman Smith: Diversified Funds: Large, growing, techy
• Libera's CLOSED-END COUNTRY FUND REPORT -- James Libera: Global economic growth to slowly accelerate in last qtr '03 and 2004

• MONEYLETTER -- Walter Frank: The return of the emerging markets
• PINNACLE LETTER -- John Eckel: Value stocks and funds continue to provide good risk adjusted returns

MONEYLETTER
360 Woodland St., P.O. Box 6020, Holliston, MA 01746.
1 year, 24 issues, $150.

       Walter Frank: "Emerging markets have returned to Wall Street's favor. A bond guru such as Bill Gross of PIMCO recommends emerging market bond funds as one vehicle to invest in for yield in this era of unsatisfactory yields from domestic bond funds. The international analysts at the always-prudent T. Rowe Price family of funds recently issued a favorable study of emerging market equities. T. Rowe Price money managers have long experience in emerging market investing. Their views have substance. Something has changed.

       Going back only a few years, emerging markets were a mess in the mid-`90s. In fact the source of the turmoil that hit world markets twice in 1997 and 1998. In '97 there was the Asian currency crisis with rolling devaluations (remember the "Asian flu"). World markets, including our own, took it on the chin. In `98 there was the Russian devaluation and again a pronounced fall for the U.S. market.
       As a result of these crises there has been significant reform undertaken in emerging market countries. The crises erupted in the form of currency crises, though underneath there was more at work than just the collapse of currencies, certainly so in Asia. Still the currency issue was clearly Numero Uno, and that was addressed first. Most emerging market countries abandoned a fixed exchange rate in the aftermath of the crises and allowed their currencies to float. The transformation has been amazing.
       As the T. Rowe Price study (written by Philip Weiss and Todd Henry) says, "We believe that the risk of multiple currency devaluations combined with an economic crisis that spreads from one country to another is behind us." In other words, no more flu. The reason for this view is the fact that, "Many of the emerging market markets now have significant current account surpluses" With the surpluses the emerging market countries are "much less vulnerable to external market conditions."
       A second, extremely important factor is corporate reform. This is something Paul Matthews and Mark Headley of the Matthews family of Asian funds have emphasized again and again. Their point has been that the Asian crisis, at its core, can be attributed to cronyism and sloppy, inefficient management practices.
       Since the crises corporate reform has taken over, especially in non-Japan Asia. As the Price analysts point out, as a result of reform and restructuring. "For the first time in approximately 10 years, the return on equity for emerging market companies exceeds that of their developed counterparts." They add, "Much more attention is now being paid to delivering profitability."
       It's easy to see why the investment potential of emerging countries' markets.

       In the past what made Southeast Asia such an attractive and profitable place to invest in, whatever the flaws, was its dynamism. Growth rates in Asia- Hong Kong, Singapore, Thailand, Malayasia, Taiwan-outstripped anything in the developed world even as the developed world grew. Then, of course, Asia hit the wall as the currency crisis hit. As if that were not enough, not too long after the bubble burst, the developed world sank into recession, and most Asian economies suffered accordingly.
       Even so, growth did not disappear everywhere in Asia. First, there was Korea, which continued its development to a modern economy with a growing middle class. Second, there was China. There is no question that China is the most rapidly growing economy of size in the world, however the experts shave the official Chinese figures.
       What difference does this make for Asia's emerging economies? All the difference in the world. We all know China as a great exporter. Every time we buy anything at a retail store, we find it has been made in China. No wonder China runs a huge trade surplus with the U.S.
       What we don't appreciate yet is that China is also a major importer, and its imports are growing as its growth proceeds. China just recently reported that it ran a trade deficit for the first time. And who are the important exporters to China? Its neighbors in Southeast Asia. The Economist noted recently that for some of its neighbors, China has replaced the U.S. as their biggest export market. China's growth is now creating growth in the whole region.
       As a result of China's steady growth and other forces, the cyclical nature of the Asian developing economies is being markedly dampened. This translates into market opportunities. The T. Rowe Price paper says, "The social, economic, and political changes that are taking place are making it much easier to find robust, sustainable growth opportunities than in the past." The study goes on to say that increased consumer confidence has resulted in "greater domestic demand and sustainable growth" in financials (mortgages), telecommunications (mobile phones, etc.) and outsourcing (IT and services).

       Wall Street's budding awareness of Southeast Asia's potential was set back by the Sars outbreak in China and Hong Kong. Economic life in the affected areas ground to a halt, and there was an issue as to what this would do to growth expectations. Fortunately, by severe action, the outbreak was contained in relatively short time. The epidemic did, however, cripple second quarter earnings.
       But now a rebound is occurring. Pacific Tier's Mark Headley reports that on a recent trip to China, he observed that business travel was normal and hotel occupancy had risen from 10% to 70%. It is not foreign tourists that are providing the occupancy, but the Chinese themselves. The tourists have not returned.
       There is still wariness about the about the return of the SARS virus next winter. That is to be expected, and will be a factor in Asian markets for the next six months.

       Those are the words of the pithy Headley when asked about stock valuations in the region. That may be so, but it is not as if the region is being totally ignored. After all, Matthews own Pacific Tiger Fund was up over 30% for the year-to-date at press time.
       As Headley said, there were some ridiculously low prices for stocks earlier this year. Property stocks, for example, were attractive in Hong Kong and Singapore. Some of those anomalies have obviously been corrected as the Pacific Tiger performance shows.
       In Headley's own words, "Stocks have moved from dirt cheap to relatively cheap." Compared with current price-earnings ratios in the U.S. market of 20-25 times (note these are not forward-looking ratios), Southeast Asia is selling at 12-15 times. There is room to move up, but Southeast Asia will sell at a discount for a long, long time.
       We continue to find Southeast Asia attractive. Still we are not about to change our allocations while the U.S. economy is in the early stages of a profit recovery. However, the relative attractiveness of markets changes over time. We suspect there is more Southeast Asia in our future."

EQUITY FUND OUTLOOK
P.O. Box 76, Boston, MA 02117.
Monthly, 1 year, $139.

       Thurman Smith: "The hunt for large-cap funds that might be helpful in the next up-leg includes a requirement for a meaningfully higher-than-market Growth Potential, a proven ability to gain over a period that includes the recent bear market, recent good relative strength, and a meaningful technology exposure. A search for still-open large-cap funds outdoing the market since the October 2002 low, with a technology exposure at least 15%, and a Growth Potential suggesting competitive gains in up-markets yields only five funds.
       Leading in performance is Matrix Advisors Value (MAVFX). It may stumble once in a while, but it gets back up quickly. It declined only a third as much as the market in the three-year bear market. While its ISQ is under the norm by virtue of its 2002 decline, its Growth Potential, bear market performance and very good recent strength suggest it as a choice for portfolios that could handle its above-market risk and that need more large-cap and technology exposure. It is becoming increasingly difficult for small fund shops to meet new regulatory requirements, so Matrix has interested Strong Funds in taking over all but management. It would be known as the Strong Large Cap Value Fund, assuming shareholders approve this move in October. The downside of this arrangement will be a higher expense ratio, except for existing shareholders. So if this fund is of any interest, it would be well to get at least a minimum position soon.
       Two years into managing Fidelity Capital Appreciation (FDCAX), Harry Lange started a pattern of noticeable outperformance vs. other large-cap growth funds, and respectable, but not earth-shaking, outperformance over the S&P 500. The fund declined 47% in the bear market. A heavy tech weighting going into 2003 generated very competitive recent returns, though that exposure is less now. Lange does pay for growth: The portfolio P/E is a third higher than that of the Wilshire 5000. Total net assets of $2.6 billion lead to a large number of holdings (171), not a situation conducive to long-term consistent outperformance.
       Vanguard Primecap (VPMCX) is managed by outside veteran growth manager Howard Schow and a team of four other managers. Over any five-year period it has well exceeded its large-blend peers, but in five calendar years out of the last ten its return was slightly below its peers. Prime-cap has been around since 1984 and has a whopping $15 billion in assets. It has a $25,000 minimum initial investment and will entail a trading fee if not purchased direct.
       Compared to the typical large-cap fund, low-profile Cambiar Opportunity Institutional (CAMOX) is more concentrated, the sector mix more eclectic, its median market cap smaller, and it holds significant (17%) foreign issues. It had a rough time in the earlier part of this year, but has finished ahead of the S&P 500 in each of its four full calendar years. It dropped 17.2% in the bear market, less than half the market's decline. Net assets are a modest $30 million. Some occasional short-term under-performance is attributable to manager Brian Barish's overweighting favored issues. But that may be part of the price to take advantage of a vehicle likely to do much better than most large-cap choices over a period of mixed market conditions.
       Market-risk Profit Value (PVALX) correlates closely with its large blend peers, but with a tad better results. It offered no protection from the bear market, with a loss of 40.6% over its three years, almost as much as the market. A 2.25% expense ratio is not encouraging either."

Libera's CLOSED-END COUNTRY FUND REPORT
725 15th St., Suite 501, Washington, D.C. 20005.
Monthly, 1 year, $225.

       James Libera: "The rise in global equity prices during the first half of 2003 was driven by oversold conditions, attractive valuations (in Europe and the emerging markets), low interest rates and expansionary monetary policies. However, the reversal in bond yields over the last couple of months has caused global stock markets to waver. Valuations are less compelling than at the beginning of the year. However, we expect central banks to remain accommodative. Much of the expanding liquidity should continue to find its way into equity markets. We expect global economic growth to slowly accelerate during the last quarter of 2003 and 2004.
       Europe's economy is showing few signs of recovery and we project just 0.5% GDP growth in 2003. We now think recovery will not occur until 2004, when we expect 1.5-2% growth. The European Central Bank will remain accommodative. Governments in France and Germany, recognizing that their countries' slow growth is not just cyclical in nature, are finally beginning to make some structural changes. European equity markets, though not quite as cheap as at the start of the year, are still selling at just 13x 2003 earnings. That remains attractive, especially compared with the 19x earnings in the U.S.
       Central Europe is experiencing economic difficulties. Dependent on exports to a stagnating western Europe, central Europe will grow only about 3% in 2003. More worrying is the rise in budget deficits to an average 7% of GDP. However we expect improved growth and deficit numbers in 2004. Accession to the European Union in May 2004 is still on track. Central Europe's equity markets should do well in the lead-up to EU enlargement, and for years after, as the region plays economic catch-up.
       The Japanese economy and equity market should both benefit from an apparent Bank of Japan policy to increase money supply via unsterilized intervention in the currency market. Prime Minister Koizumi, seeking re-election, has pledged to reinvigorate the reform agenda he advocated when first coming into office. There is also some good news on corporate profits. However, the economy is showing only tentative signs of recovery, and without buoyant growth, we doubt that a sustainable bull market can develop. However, we recommend an increase in exposure to market weights.
       Asia-Pacific economies represent the fastest growth area in the world. Regional GDP growth should approach 5% in 2003, rising to 6% in 2004. However, equity market returns this year have been comparatively modest, mainly in the 10-20% range. Equity markets are selling at an average 15x 2003 earning, inexpensive considering the growth prospects. We are selling Australia iShares.
       Latin American economic growth is dependent on an upturn in the U.S. economy. We project regional DGP growth of 2% in 2003, followed by 4% in 2004. Latin American equity markets have enjoyed significant gains this year, from 15% in Mexico to roughly 30% in Brazil and Chile and more than 60% in Argentina. Much of the strength has been a rebound from depressed levels, as the possibilities of economic crises in Argentina and Brazil have waned. Despite the gains, valuations are still moderate, and we recommend over-weight exposure here."

PINNACLE LETTER
Greystone Ct., W., 573 Hopemeadow St., Simsbury, CT 06070.
Published monthly for clients of Pinnacle Investment Mgt.
www.Pinnacle-Investment.com.

       John Eckel: "When the S&P 500 performed so well in late 1998 and 1999, growth stocks advanced strongly, while many value stocks actually lost ground. Recently however, both market sectors are participating in the advance and it makes sense to emphasize value stocks and funds, which, over long periods of time have performed at least as well as growth stocks, but with lower volatility. Coincidentally value stocks are one of the beneficiaries of the recent tax cut since they typically pay higher dividends.
       Value stocks and funds such as Oakmark, Oakmark Select, Oakmark Equity and Income, FPA Crescent, Longleaf Partners, and Pbhg Clipper Focus should continue to provide good risk-adjusted returns. Small cap value funds should also do well, albeit with more potential risk. Particularly noteworthy are American Century Small Cap Value, Boston Partners Small Cap Value and Franklin Microcap Value.
       International value funds such as First Eagle Sogen Global and Overseas, Longleaf International, Tweedy Browne Global, and Franklin Mutual Discovery should also perform well with limited volatility and may benefit from a falling dollar.
       Growth stocks and funds offer an opportunity to participate in the market rebound, albeit with potentially more volatility. Mid and large-cap growth stocks and funds such as Marsico Focus, Jensen, and Liberty Acorn 20 and small cap growth funds such as Bjurman Micro Cap Growth and Westport Small Cap should do well over the next bull market cycle.
       Individual stocks that look attractive include United Health Group, Washington Mutual, H&R Block, Autozone, Stryker, Dell, ebay, Yahoo, Gilead Sciences, Paccar, St. Jude Medical and Corinthian Colleges. Please remember that it is always important to maintain a diversified portfolio but space limitations prevent us from recommending a complete portfolio."