(PUB) Investing 2015

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Tops in Emerging Markets Tracking Morningstar Analyst Ratings | Russel Kinnel

most have less invested in Taiwan than the 14% found in the FTSE Emerging Index that this fund tracks. Taiwanese stocks gained about 7% in 2014 . Mean- while, the index has no exposure to South Korea as it considers that country a developed market, while the typical fund has 9% in South Korea, whose market fell about 13% . Silver-rated Harding Loevner Emerging Markets HLEMX posted a second-quartile return for the trailing 12 months. We feature frontier markets in our Research article this month, and they played a supporting role for this fund. Pharmaceutical stocks from South Africa, India, and Hungary boosted returns in this eclectic portfolio. The emphasis is on growth companies with clear competitive advantages and strong growth rates, but the frontier elements make the fund stand out. Silver-rated DFA Emerging Markets Value DFEVX lagged its peers a bit, showing that it wasn’t a clean sweep for all passive strategies the past year. The fund tilts to the value side of emerging markets by limiting itself to the cheapest third based on price/book valuations. Unfortunately, that bias led it into some hard-hit oil companies like Gazprom OGZD of Russia and Petrobras PBR of Brazil. On the plus side, the fund’s 10 - and 15 -year returns remain strong. One challenge for the fund is that the value screen will lead it into giant government- controlled companies like Gazprom. Gold-rated American Funds New World NEWFX also lagged during the past 12 months. The fund gets some of its emerging-markets exposure through developed-markets companies mainly in Japan, the United Kingdom, and Switzerland, and those were not strong-performing markets the past 12 months, as Japan and the U.K. were hurt by a strong dollar. While the fund’s relative performance bounces around a fair amount, it tends to be among the least volatile because of its developed-markets exposure and willingness to hold some cash and bonds. K

This figures to be an interesting year for emerging markets. The current environment of falling share prices, falling oil prices, and a strong dollar could take us in a lot of directions. Let’s take a look at emerging-markets Morningstar Medalists and how they have performed of late. Virtus Emerging Markets Opportunities HEMZX , with a Morningstar Analyst Rating of Silver, per- formed brilliantly, and it’s no mystery why. The fund has a big overweighting in India and a big under- weighting in China. India rebounded from a poor 2013 when the fund lost 6 . 6% to have huge gains the past 12 months while China’s markets were flat. Rajiv Jain has 28% of assets in India versus 11% for peers and 7% in China versus 16% for peers. So, in the short run, that positioning will have a major influence. However, the main point of buying the fund is Jain’s skill in finding high-quality companies at decent prices, which ought to lead to solid long-term results even if India’s markets are merely middling for the next few years. Bronze-rated T. Rowe Price Emerging Markets Stock PRMSX also put up top-decile 12 -month returns. Gonzalo Pangaro doesn’t have big sector or country bets. Rather, it’s issue selection among growth stocks that has driven strong returns. Tech names like Taiwan Semiconductor Manu- facturing TSM and Baidu BIDU spurred results. It’s a welcome sign, as things have been up and down for Pangaro since he took over in 2008 . That mixed long-term record is why the fund is Bronze and not Silver. Vanguard Emerging Markets Stock Index VEMAX had a top-quartile year—a rarity for an index fund. Obviously, Vanguard doesn’t make deliberate bets versus the category, but the category does make deliberate bets versus the index. Specifically,

What Are Morningstar Analyst Ratings?

Our ratings are chosen for long- term success. Analysts assess a fund’s competitive advantages by analyzing people, process, parent, performance, and price. They do rigorous analysis and then submit their ratings to a committee that vets their work for thoroughness and consistency.