LESSONS FROM WORLDCOM

More such shocks may dent US investor confidence, so a safer bet could be Asia

A poll of 19 fund managers last week, showed that only three have unit trusts with some exposure to WorldCom. And these three have a negligible exposure to WorldCom. Nothing to raise the alarm.

The WorldCom debacle highlights the benefits of diversification, a key value proposition of unit trust investing.

There are great risks to putting a larger part of your investments into a few well known names on Wall Street.

There is greater safety in large numbers because even if a few companies in a diversified portfolio run into problems, it won't drag down your investments too badly.

But WorldCom - and other recent incidents of accounting irregularities - have done indirect damage to investors who have placed their faith in US stocks.

The episode has caused investors to lose confidence in the US corporate sector and its accounting system and this has hit stock prices on Wall Street.

There is a lot of uncertainty about whether more US companies will fall prey to accounting fraud. This is a problem because fund managers buy stocks based on earnings figures provided by companies. But if there are doubts about the credibility of these figures, then investment decisions could also go awry.

It is this, coupled with the high valuations and a weak greenback that have caused stock prices on Wall Street to fall sharply in the last few months.

Schroder Investment Management, said that it sees the recent falls as an opportunity to buy at attractive levels.

It adds that it is important to put the recent incidents in perspective. They only involve a few companies and the "vast majority of companies follow prudent and proper accounting practices".

The fund manager is of the view that "companies that do live up to expectations will be rewarded by investors in the months ahead".

It is positive on the second half and expect investors to refocus on the improving economic fundamentals which have been overshadowed by WorldCom and the likes.

Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Henderson Global Investors, says that US stocks are 20 per cent undervalued at current levels.

With the sharp correction, he feels that US stocks have largely discounted the bad news and are close to forming a bottom.

"WorldCom had already been sold down heavily as the market knew it was struggling. Its share price peaked at US$62 in 1999 and had fallen to below US$1 before last week's announcement of accounting irregularities. After all its CEO was forced out only a few months ago".

So maybe the WorldCom espisode should not have come as a major surprise to many investors.

But he warns that "the likelihood of more Enrons and WorldComs being uncovered and the blow to investor confidence in US companies will likely constrain US equities for some time to come".

Consequently the US equity market may be a relative under-performer versus other global equity markets for many years to come.

If this scenario is to be believed, then investor looking for better returns may be better off investing more in Asia until concerns about corporate governance in the US blows over.

It is generally felt that Asian companies are less vulnerable to accounting irregularities.

This aside, Asian stocks are attractively valued and should the greenback head lower, we could see fund managers switching more funds out of the US into Asian bourses.

For those looking to invest in Asia, some funds to consider include the Aberdeen Pacific Equity Fund, INVESCO GT Asia Enterprise Fund, Savers Korea Fund, Franklin Templeton Korea Fund, Schroder Singapore Trust, Aberdeen Singapore Equity Fund, Aberdeen China Opportunities Fund, HSBC Indian Growth Fund, Aberdeen Malaysia Equity Fund, Savers Malaysia Fund, Aberdeen Thailand Equity Fund, Savers Thailand Fund and AIG Acorns of Asia Balanced Fund.