8
After years of outperforming the established markets
in Europe, the United States, and other developed
countries, emerging stock markets have hit some
bumps. Concerns about the slowing growth rate in
China and many other countries, along with poli-
tical worries in Brazil, Turkey, Russia, and elsewhere,
have weighed on these markets.
The disparity between equity performance in devel-
oped versus emerging markets became pronounced
in
2013
and early
2014
. In the
12
-month period
through January
2014
, the
MSCI
Emerging Markets
Index suffered a loss of
10
.
2%
, in sharp contrast
to the
MSCI EAFE
Index of developed markets, which
rose
11
.
9%
.
Given that
22
-point gulf, we thought it would be
useful to look at the performance of the core interna-
tional funds in the Morningstar
500
(those in the
three foreign large-cap categories) that had substan-
tial emerging-markets stakes to see how their
performance stacked up. The results are not quite as
one might expect and are all the more instructive
for that.
A Varied Impact
Of the
35
foreign large-cap funds in the Morningstar
500
, only nine (excluding index funds) had emerg-
ing-markets stakes of greater than
13%
of assets as
of their late-
2013
portfolio. (That figure was chosen
because it’s higher than the average emerging-
markets stake for any of the three foreign large-cap
categories.) This figure excludes investments in
South Korea and Taiwan, which are classified as
emerging markets by
MSCI
but not by Morningstar
and some other services. If those countries were
included, the numbers for the emerging-markets
stakes would be higher, but the overall pattern would
look much the same.
Given how poorly emerging markets performed over
the
12
-month period, one might have expected all of
these funds to have finished in the bottom quartile of
their respective categories. As it turned out, the
results were much more varied, with the funds distrib-
uted fairly evenly throughout the percentile rankings.
Examining the reasons shows how evaluating fund
performance can be more challenging, but also more
interesting, than one might suspect.
Of the group, the worst performer was
Virtus
Foreign Opportunities
JVIAX
. That fund’s manager,
Rajiv Jain, has also run emerging-markets portfolios
for many years and thinks that tremendous opportuni-
ties can be found there, most notably in India. So
it’s no surprise to see an emerging-markets stake of
14%
in that fund. It’s also no surprise to see that it
sat nearly at the bottom of the foreign large-growth
category during this period.
What makes things interesting, though, is that the
fund’s emerging-markets stake was not the only
culprit; it may not even have been the most important.
In fact, that stake is just a bit above the foreign
large-growth category average. More critical was that
Jain has invested very sparingly in Japan for years,
saying that tempting growth companies at appealing
prices are few and far between in that country.
With Japan posting by far the biggest gains among
developed markets in
2013
, that lack of exposure—
the most recent portfolio had just
1%
of assets in
Japan, versus a category average of
12%
—held the
fund’s returns back in relative terms.
The story at
Janus Overseas
JAOSX
, which landed
near the bottom of the foreign large-blend category,
is different in one way but similar in others. With more
than
40%
of assets in emerging markets, this fund
has much more exposure than the Virtus offering, and
there can be little doubt that that played a substan-
tial role in its underperformance during this period.
However, there’s more to the story here as well.
Manager Brent Lynn also had a big overweighting in
energy stocks—some in emerging markets, some
not—and that caused much pain as that sector stum-
bled. Like Jain’s fund, this one also was hurt by going
light on Japan, though not to the same extreme as
How Slumping Emerging Markets
Affected Your Foreign-Stock Fund
Morningstar Research
|
Gregg Wolper
