The Investment Company Institute (ICI) is asking the central bank of Malaysia to exempt mutual funds from a freeze which prohibits converting the Malaysian ringgit to dollars and transferring those proceeds out of Malaysia until Sept. 1, 1999. The ICI warned that failure to grant the exemption would discourage mutual funds from investing in Malaysia in the future.

Fund industry officials said the immediate financial stakes are not that great. Funds have less than $1 billion in assets in Malaysia, fund tracking firms estimate. Nevertheless, the inability to cash out stakes in Malaysian investments and convert the proceeds into U.S. dollars has reminded investors of the political risk factor in overseas investing, said Gregg Wolper, international funds editor at Morningstar.

"It reminds you of some of the risks of emerging markets," Wolper said.

This is the first time the ICI has asked a foreign government to make an exception to its currency policy with respect to mutual funds, an ICI spokesperson said.

A spokesperson for the Malaysian central bank, Bank Negara, said last week he was unfamiliar with the ICI's request for an exemption. The spokesperson, in New York, could not say what the central bank may do in response to the proposed exemption.

On Sept. 1., Bank Negara said it would bar conversion of the ringgit and its subsequent transfer out of the country in most cases to reduce speculation on the currency. Mutual funds face regulatory problems as a result of Bank Negara's decision to ban conversions for one year, said Matthew Fink, ICI's president, in a letter dated Nov. 5 to the director of the Malaysian central bank's Exchange Control Department.

The decision to suspend conversions to dollars and subsequent transfers out of the country for a year makes it "difficult" for funds to set daily net asset values with respect to Malaysian securities, Fink said. And the new rule has raised concerns that Malaysian securities may no longer be classified as liquid securities, a development which could pose problems for funds' compliance with federal securities laws in the U.S., Fink said.

"Repatriation restrictions severely limit investment managers' ability to adjust their portfolios when they deem it to be appropriate or to liquidate investments in response to contractual or regulatory obligations," Fink said. "They also are seriously at odds with international investment management norms."

In a report earlier this year, the ICI estimated that open-end mutual funds had a net investment of approximately $20 billion from 1990 to 1997 in emerging markets.

Wolper said the ICI's regulatory concerns probably pose greater troubles for the fund industry than the investment issues. International funds which had some investment in Malaysia largely had reduced their position prior to the freeze, Wolper said. The ICI reported that an index of Malaysia stocks advanced 5.4 percent from January, 1996 to June, 1997. It then slid more than 40 percent from July through December, 1997, the ICI reported.

The closed-end Malaysian Fund advised by Morgan Stanley Asset Management has about $22 million in assets, Wolper said. The WEBS Index Fund's Malaysia fund has about $43 million. Those appear to be the only purely Malaysian funds offered in the U.S., Wolper said. Wolper estimated total Malaysian exposure at less than $1 billion for the fund industry.

But while the dollar amounts are not high, the Malaysian moves remind investors of the political risk in investing abroad, Wolper said. "It's just something to keep in mind," Wolper said.

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