TIGER BURNING BRIGHT ONCE AGAIN: ASIA FUNDS START TO SHOW STRIPES

Planners who slashed their clients’ exposure to emerging markets before the Asian debacle should take a bow. But maybe those who pulled clients completely out and left them on the sidelines should take a back seat.

After teetering on the brink of ruin last year, Asian markets are well on the road to recovery, and stock mutual funds investing there are enjoying the ride.

As of June 10, Pacific region funds (excluding Japan) had average year-to-date gains of 32%. The average domestic growth fund, meanwhile, gained only 5.8% in the same period.

The three other Asian investment categories tracked by Lipper Analytical Services have also surged this year. Pacific Region funds that include Japan had gained 26.7% through June 10, China Region funds nearly 18% and Japanese funds 28.7%.

The net asset values of both Pacific Region indexes (with and without Japan) are the highest they have been since mid-October 1997, when the meltdown began in earnest.

No doubt, caution is in order. It should be noted that over five years, all four categories of Asian funds are still in the red, if barely.

Yet the rebound seems to have vindicated financial planners who advised clients to ride out the emerging markets slump.

“My theory is, you should have always been in there,” says D. Randolph Waesche, a New Orleans-based planner who specializes in advising wealthy clients and closely held companies. “What we’re seeing is more confidence in these markets, and more money flowing back in.”

Things have improved so much that even portfolio managers of domestic growth funds are considering dabbling in Asian stocks.

“I’m kicking myself a little bit,” admits John Wilson, manager of State Street Research Investment Trust Fund in Boston. “In the past year and a half, I’ve had a pretty strong interest in working in Japan. But I haven’t done it as yet.”

Asian funds aren’t for everyone, of course. Their narrow focus and vulnerability to a host of influences makes them intensely volatile.

Ron Roge, a Bohemia, N.Y., planner whose average client portfolio holds $1 million, recommends broader-based international funds as an alternative. “We’re basically not smart enough to pick regions or countries. We like stock-pickers who go international.”

Such stock pickers are likely to have been loading up in Asia of late. Explains David Masters, analyst for Standard & Poor’s Fund Services’ Micropal unit: “A lot of these actively managed funds have their weightings based on some sort of benchmark in the regions. As the benchmarks rise, they put more money into those areas.”

Two major benchmarks the funds may follow are the Morgan Stanley Capital International World and World Excluding U.S.A. indexes. Year to date, the former is up 7.5% and the latter 5.6%.

So, even if briefly, investors who toughed out the beating Asian funds took last year are walking — finally — on the sunny side of the street.

“It’s been a sea change from where we were,” says Paul Matthews, who runs the San Francisco-based Matthews International Korea Fund. As of June 10, his fund had a breathtaking one-year return of nearly 211%, best of the bunch.

Encouraged by cheaper prices and the structural reforms made by formerly protectionist governments, big foreign investors are moving back into Asia.

“You’ve had smart institutional money go in and invest in companies there, and that’s been followed by the U.S. mutual funds,” says Keith Stock, global director for the financial services industry at Ernst & Young.

Foreign investments have led the recovery in Korea, where the economy shrank by more than 5% last year, Mr. Matthews says.

Examples: Amsterdam’s Philips Electronics NV recently acquired 50% of Korea-based LG Electronics, a major producer of liquid crystal computer display terminals.

And Goldman Sachs Group Inc. did much to boost the confidence of fund managers when it bought 17% of Korea’s Kookmin Bank.

America and Europe are leading the pack in the return to Asia. But in Korea, Mr. Matthews says, “We’re also seeing Japanese companies acquiring Korean firms.”

Money managers agree that the veil of recession is lifting.

“In our view, the Asian crisis appears to be an event of the past,” says Robert Conlon, co-portfolio manager of Guinness Flight Mainland China Fund. His fund, down 2.4% for the year through May, recovered in a hurry — moving to a positive 7.4% by June 10.

up 8.7% in a week

Theresa Guzman, lead portfolio manager at Scudder Pacific Opportunity, saw a similar turnaround early this month. Her fund, which had lost 12.6% in 1998, gained 8.7% in a single week.

Still, she says, “We have a long way to go from where we were” before the Asian tigers tanked.

U.S. fund managers insist the Asian recovery has legs. And some planners see those markets as an alternative for investors who are nervous about the long-running domestic bull market, and the astronomical price-earnings ratios it has created.

“The fundamentals of the emerging markets, from a p/e perspective, are much better than they are domestically,” Mr. Waesche says.

He recommends that clients have from 20% to 30% of their portfolios in overseas funds, with 5 to 10 percentage points in emerging markets funds and the balance in mature economies.

Mr. Waesche says: “I don’t think this is a blip. I don’t know that we’re going to see continuing 20-to-30% returns from those regions. But we are going to see some strong performance.