By George Cole Scott
President, Closed-End Fund Advisors, Inc.

During the latter part of 1999, my investment advisory firm made the decision to raise some cash, partly because of our concerns about high security values and to try to be prepared for new investment opportunities in the millennium. All year we have been concerned with high valuations especially in the U.S. markets. In spite of this, we have remained 90% invested at home, which has paid off handsomely. We have been avoiding the foreign markets in the past 12 months because we felt they were more vulnerable to a decline because of the so-called Y2K bug. Now the millennium is here, we have been taking advantage of the recent declines in world markets to increase holdings in some better regional country funds, especially those in Europe and Asia. For global investing, we have been using some of the Templeton Asian closed-end funds as well as some other funds in Asia and Europe.

Because I am fortunate to know Sir John Templeton, I recently spoke with him by telephone in Nassau. I became acquainted with Mr.Templeton when I published my closed-end fund newsletter from 1988 to 1996. Following this, I spoke with James Libera who publishes the "Closed-End Country Fund Report" in Washington, D.C.

In early January, I dialed Mr. Templeton's telephone number:

"Hello, this is John Templeton." "Good morning, Sir John. This is George Scott. How are you?" "Fine, I hope you are well."

I hadn't spoken to Mr.Templeton for some time so I asked him about his thoughts for the millennium. He now spends most of his time with what he calls "spiritual matters", i.e. doing work for The Templeton Foundation and related interests. He remembered that I had interviewed him several times for "The Scott Letter: Closed-End Fund Report." He immediately asked me if I were going to publish anything. I answered that I no longer published the newsletter but still occasionally write free-lance articles.

Q."What are your thoughts for the millennium?"

Templeton: "On the new thousand years, my best answer is that it will be very surprising. Nobody can possibly imagine the enormous changes that will occur. Now, if we are talking a hundred years and stock prices, I did publish recently a prediction that the Dow Jones Industrial Average will rise above a million by the end of the new century. In that century, there will also probably be twenty times when the Index will go down more then 40%."

Q."That is a long view into the future. How did you come up with that one?"

Templeton: "By using mathematical probabilities. The increase to a million is a smaller percentage increase than has occurred in the past century. Secondly, I do not think we will have as many Bear Markets as we had in 1929 when the market went down 89%. Later that day, I saw him on "The Nightly Business Report" elaborating this theme about stock markets in the 21st Century.

I next told Sir John that I have started work on a new book with co-author Professor Fredman on closed-end funds. He said he would look at the manuscript. I mentioned that I really enjoyed reading one of his books, "The Humble Approach. Scientists Discover God." I added my interest in what was happening in the churches of Cuba after visiting the island in 1995. He said this would be a very interesting story about which little is known and asked if I would send him anything I could find or publish about this. I said I didn't know when I would be returning to Cuba, although more and more Americans are going there including a group from the World Affairs Council in the near future. Then I mentioned that I would like visit with him in Nassau after a coming trip to Orlando to talk to him about this and related matters. He agreed, so we set up an appointment for late January.

I next talked to James Libera:

Q. Jim, after so many years using closed-end funds for global investing, do you have any thoughts about the millennium?

Libera: I think we have come through a decade where the U.S. economy and the U.S. equity markets have been dominant. This is likely to change in the next ten years. The United States will continue to have the best companies in the world. However, many other areas are starting to catch-up. They are using U.S. management techniques and adapting our technologies. Many are gaining on us in several areas, particularly in Europe. There is a wave of restructuring, mergers and acquisitions in this area that is making them more competitive than in the past.

Q. Very interesting. Now, tell us about your investment style and how you use closed-end funds.

Libera: "I essentially use the top-down investment method. I look at the equity environment, such as what is happening with economic growth and interest rates and so forth. I next determine a regional allocation, such as how much to put into different areas such as whether to invest in Europe, Asia, Japan, Latin America, or Eastern Europe. Then I get to the country level and try to assess which countries are the most attractive from an investment standpoint, looking at the macro-economics, interest rates and stock market valuations. I also look at what the country is doing in its policies to produce either a favorable or unfavorable outcome for equity investing. Since I concentrate on regional and single country analysis, closed-end funds are ideally suited for this. We can target what countries and what regions we like using closed-end funds. I use these methods versus the bottom-up approach of looking at individual companies. As there are hundreds of thousands of companies to look at globally, I don't have the resources for this.

Q. Isn't there some divergence between markets around the world?

Libera: I think markets are partially correlated. If the U.S. markets have a bad time, then it will affect other markets. However, they are not totally correlated and, therefore, the diversification you get by investing in other countries usually will help your portfolio in terms of its risk/reward trade-off. You can get additional returns and lower the risk in your portfolio.

Q. Tell us how closed-end funds work better for this than other types of investing.

Libera: Since my analysis is based on looking at the attractiveness of different national markets, closed-end funds are the way to put that into effect. There aren't many single country mutual funds. There are some regional ones, but there is much greater choice among the closed-end funds. I also use the webs. This stands for "world equity benchmark share." They are somewhat like the country funds except they are structured so they will not go to large discounts or premiums because there is a way to arbitrage the difference between the various webs. However, I use many more country funds than webs because I like to take advantage of the discount. There are cases where country funds go to premiums, and then I opt for the webs. We use the country fund for 80% of my universe.

Q. Are there any particular countries or regions that you favor now?

Libera: I try to keep a balanced approach as it is difficult to know what regions will do well. My portfolios are balanced between Europe, Latin America and Asia. The heaviest weightings are in Europe right now. I have favored those markets with lower valuations such as Ireland, Spain and Austria. Some of the peripheral European markets didn't do well last year and so are at more attractive levels. However, I generally favor a broad approach. I have used the Europe Fund and the European Warrant Fund that is leveraged and therefore has more risk. In Asia, I have used the India Fund. In Latin America, I like Brazil which is still inexpensive despite its good performance last year. Israel is also favored as interest rates are coming down there.

Q. What other countries have declining interest rates?

Libera: We favor the Latin American economies--particularly Brazil, Mexico and Argentina. They qualify as they pushed their interest rates up to higher levels to support their currencies. Central Europe has a very strong investment outlook over the next three years---particularly Poland, Hungary and The Czech Republic. These countries are expected to soon soon be admitted to The European Union, possibly by 2003. Historically, when a country moves into a monetary regime such as exists in the European Union, it effects economies and stock markets positively. The currencies are a little shaky in Eastern Europe and interest rates have risen, but I still favor this area. I have used the Central European Equity Fund, which has reduced its German exposure so you can get a purer play on Eastern Europe.

Q. How would you like to wrap this up?

Libera: I think its going to be a strong period for global investing over the next ten years with numerous ups and downs. In spite of this, I think it will be a very positive period for investors in this century. Thanks Jim, we appreciate your comments.

Closed-End Fund Advisors maintained a low profile on overseas investments in 1999, no more than 10% because of the high volatility caused by Y2K concerns. Since the first of the year, we have gradually been increasing our exposure to select regional and country funds. We are favoring those in Europe and Asia, but may also choosing a few funds in Latin America as the year progresses.

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