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Mark Mobius on emerging markets: ‘The picture has changed dramatically’

Mark Mobius in Toronto on Oct. 24, 2011.

Peter Power/The Globe and Mail

With a 40-year history of successfully investing in the world's developing economies, Mark Mobius has been called the "king," the "father," the "dean" and even the "Pied Piper" of emerging markets.

Recently, Mr. Mobius has been stepping back from day-to-day fund management and, last March, his name was removed from Franklin Templeton Investments' slate of emerging-markets strategies, including the flagship fund he led for 26 years.

While still maintaining an advisory role at Templeton as an executive chairman, Mr. Mobius spoke with The Globe and Mail about what investing in developing economies represents to today's investors and whether the recent rebound in emerging-markets stocks can last.

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Why the change in your role?

The idea was to demonstrate delegation of responsibilities to my colleagues – many of them have been with me for 30 years. That was already happening. I've been handing off day-to-day responsibilities for years. Now, we've just formalized it.

Was there any blowback from investors who wanted to be in funds you managed personally?

No, it was signalled to the market a long time ago. The whole thing went very well.

Emerging markets' stocks have stormed back the last year-and-a-half. Do you see that continuing?

I think so. Usually, when you get a surge like this, it lasts for an average of five years. Barring an unforeseen global crash, they'll be in good shape. Emerging markets are continuing to grow of a very fast rate – GDP growth is averaging about 4 per cent, versus 1 per cent for developed markets. And China and India are growing at 6 [per cent] or 7 per cent. One critical element is the rise of reform movements. You're seeing better corporate governance. You're seeing that in [South] Korea in spades. They're becoming more transparent, more investor friendly. Now, the smaller companies can shine. Before, they were always under the thumb of the big conglomerates. We have a lot of money in small and medium-caps in Korea.

The BRICs are starting to look like their old selves. Is that primarily a commodity trade?

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No. Look at China and India, some of the most important sectors are consumer stocks, pharmaceuticals, industrial equipment, etc. It's varied. In the case of Brazil, yes, commodities are important. But in our portfolio, we're into the consumer banking area, consumer products. In terms of the investment focus, it's much less on commodities.

Does the market overestimate the importance of resources to emerging markets?

A lot of people think that if commodities go up, emerging markets will simply be better off. But China and India are huge importers of commodities. Also, the single biggest weighting in the emerging markets index is not commodities, it's information technology. The IT weighting in the emerging-markets index is higher than the weighting in the U.S. index. The picture has changed dramatically.

Is there a particular emerging market you'd consider a contrarian pick?

If you really want to go contrarian, you'd go into Russia. With the sanctions, Russia hasn't gotten its fair share of money going into their companies. If and when the sanctions are lifted, you could see quite a spurt of activity in Russia. There are a lot of great companies in Russia.

Has the relationship between emerging and developed markets changed?

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If you take the broad indexes for the U.S. and emerging markets, you'd probably find the correlation is very high. But on an individual country basis, the correlation goes down pretty dramatically. Which is why you want to be in emerging markets in the first place. If you're going to be in a market highly correlated with Canada, why not just stay in Canada? In my mind, that's a good argument for active management.

Do you see better years ahead for stock pickers?

Yes. When the market's always going up, what do I need an active manager for? I just buy the index. But if you get too many people following the index, too many ETFs, you could have a real panic when the market starts to break. Unfortunately, if that happens, so many people could get burned they may not want to be investing in any direction – active or passive.

This interview has been edited and condensed.

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