9
Morningstar FundInvestor
April 2
014
Virtus Foreign Opportunities. Meanwhile, one of
Lynn’s most highly weighted emerging-markets
stocks—
Ctrip
CTRP
, the Chinese online travel firm—
actually scored a huge gain for the fund.
On the happier end of the spectrum lies
Dodge &
Cox International Stock
DODFX
. Its
17%
stake in
emerging markets is more than double the foreign
large-blend category average of
7%
. Yet the fund’s
returns landed in the
12
th percentile of the cate-
gory during the period in question. One explanation is
that more than
6%
of the fund’s assets were in
South Africa, with most of that devoted to one stock—
Internet firm
Naspers
—that posted a tremendous
gain in this stretch.
Longleaf Partners International
LLINX
also man-
aged to rack up a very strong return, landing in the
foreign large-blend category’s top decile, even though
it held a double-digit percentage of assets in emerg-
ing markets. Here, the answer is that this fund owns
a very compact portfolio of about
20
stocks, so to an
even greater degree than Dodge
&
Cox International,
its “emerging-markets stake” really comes down to
a few specific companies. One with a hefty weighting
in the portfolio is
Melco International Develop-
ment,
a casino company focused on Macau, and that
stock soared more than
200%
in
2013
. As a result,
far from holding it back, this fund’s emerging-markets
exposure actually propelled its gains.
Effects on the Index Funds
The emerging-markets effect did clearly boost the
fortunes of two Morningstar
500
funds in the foreign
large-cap categories, in relative terms at least.
These are the index-trackers with portfolios that are
almost entirely free of emerging-markets exposure:
Fidelity Spartan International Index
FSIIX
and
Van-
guard Tax-Managed International
VTMGX
, which
track different developed-markets indexes. Without
emerging markets dragging them down, both funds
landed in the
28
th percentile of the foreign large-
blend category over this period.
The effect is illustrated most clearly by comparing the
11
.
5%
return of these two funds with the return of
Vanguard FTSE All-World ex-US Index
VFWAX
,
which tracks a large-cap index very similar to those
of the Vanguard and Fidelity funds above—but with a
14%
stake in emerging markets. It gained only
5
.
3%
,
less than half the return of the emerging-markets-free
index trackers.
Conclusion
Two main points emerge from this examination. One
is that investors should be aware of the emerging-
markets exposure of their funds before buying them
and definitely as they continue to own them. There’s
no telling whether emerging markets as a whole
will outperform more-developed markets during any
particular time period. But knowing how a fund is
positioned in that respect will reduce the chance of
surprises for shareholders.
The second point is that such a check makes up just
part of the evaluation process. As shown, even
when the performance of emerging markets lagged
that of developed markets by a startling margin,
funds with relatively high emerging-markets stakes
could still outperform. That’s because many other
factors also play a role in performance, including
sector weightings, currency exposure, and, most
crucially at times, which individual stocks the man-
ager has chosen. The decision on how much to
allot to each company also plays a role: A fund with
8%
of assets in a stock that tanks will be affected
much more than one with just
1%
in the same stock.
Finally, even the emerging-markets weighting itself
can be an imperfect guide. The countries gathered
under that banner differ from one another in many
ways, and often their stock market performance does,
too. Funds with the same emerging-markets weight-
ing could experience a very different impact depend-
ing on which markets are represented. In short,
emerging-markets weighting is just one factor among
many that affect the performance of international
funds—and a complex one, at that.
œ
Contact Gregg Wolper at
