8
Emerging markets are a valuable diversifier and a way
to tap into some of the faster-growing and lower-
debt economies. Yet, there’s no consensus on how
much emerging-markets exposure investors should
have in their portfolios. By market value, about
20%
of foreign markets are classified as emerging, so
somewhere in that ballpark makes sense for
many investors.
Look Before You Leap
The first step for investors who want to meet that
allocation to emerging-markets stocks is to ascertain
how much exposure they are getting to such stocks
through their existing funds. Most foreign large-cap
funds devote around
10%
of their assets to such
stocks, but there are dozens that invest close to or
even more than
20%
of their assets in such issues.
American Funds EuroPacific Growth
AEPGX
currently has a
24%
position in the developing world,
while
Janus Overseas
JAOSX
currently has a
40%
weighting there.
Foreign small/mid-cap funds invest a bit more in
emerging-markets stocks than their large-cap counter-
parts, and there are a good number of smaller-cap
international-stock funds that provide lots of exposure
to such stocks, including
Artisan International
Small Cap
ARTJX
(which has a
26%
stake at present)
and
Columbia Acorn International
ACINX
(which
has a
31%
stake at present). And though most world-
stock and domestic-equity funds don’t normally in-
vest a lot in the developing world,
American Funds
SMALLCAP World
SMCWX
,
Wasatch Ultra
Growth
WAMCX
, and some others do.
Broader Is Better
Investors who decide they need more emerging-
markets exposure than they already have are best
served by diversified emerging-markets funds.
Such funds have the freedom to pursue superior
opportunities all over the developing world as well as
the leeway to tread lightly in or even avoid unat-
tractive regions and markets, while their geographi-
cally focused rivals do not have either capability.
And though some strong options—including
Oppen-
heimer Developing Markets
ODMAX
and
Virtus
Emerging Markets Opportunities
HEMZX
—are
now closed, investors seeking a diversified emerging-
markets fund still have several good options in the
Morningstar
500
.
American Funds New World
NEWFX
is a great
choice for those seeking a cautious route to the
developing world. In addition to buying emerging-
markets stocks, it invests around
10%
of its assets in
emerging-markets bonds and
30%
of its assets in the
stocks of developed-markets firms that reap sizable
portions of their revenues in the developing world.
Because of its bonds and developed-markets equities,
it has held up far better than most of its peers in sell-
offs and been the least volatile member of its cate-
gory over time. It also has an excellent management
team and a modest expense ratio going for it. And
though it can really lag in rallies, it has solid long-
term returns. (From its June
1999
inception through
June
14
,
2013
, it has posted an
8
.
8%
annualized gain
versus a
9
.
0%
annualized return for its typical peer.)
Fans of passive investing should check out
Vanguard
Emerging Markets Stock Index
VEMAX
. It
provides broad emerging-markets exposure at a dirt-
cheap price. Largely because of its big expense edge,
it has earned solid long-term returns. (Through June
14
, it has outpaced its average rival by
24
basis points
annualized over
10
years, by
57
basis points annual-
ized over
15
years, and by
64
basis points annualized
since its
1994
inception.) It tends to suffer as much as
its typical peer in sell-offs, though, as it favors larger-
market and larger-cap names, which rarely escape
such periods unscathed. And it’s worth noting that it
is transitioning to a new target index, the
FTSE
Emerging Markets Index, which excludes South Korea.
T. Rowe Price Emerging Markets Stock
PRMSX
has merit as a more adventurous emerging-markets
vehicle. It’s attractively priced. Gonzalo Pangaro and
Mark Edwards, who took the helm in April
2009
but
Your Guide to Emerging Markets
Morningstar Research
|
Bill Rocco
