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Twenty years ago, only about two dozen mutual funds
focused on emerging-markets stocks. (There were
no emerging-markets exchange-traded funds.) Almost
exclusively, they targeted prominent firms located
in emerging markets. Now, investors can choose from
more than
300
mutual funds and
ETF
s—and they’re
an increasingly diverse lot. Beyond the traditional
variety, four other types are available as well:
p
Geographically flexible funds, which invest signifi-
cant chunks of their assets in companies that have
extensive business in emerging markets but are head-
quartered in the United States, Europe, or other
developed markets.
p
Small/mid-cap funds, which focus on companies
beyond the big, widely owned names.
p
Multiasset funds, which divide their assets between
emerging-markets stocks and emerging-markets
bonds (and in some cases currencies and more).
p
Frontier-markets funds, which target countries that
rank below emerging markets in terms of stock market
access and other factors.
Geographically Flexible Funds
Approximately two dozen funds now take a geographi-
cally flexible approach to emerging-markets investing.
These funds are far from identical.
American Funds
New World
NEWFX
invests half its stock portfolio
outside of emerging markets and also owns some
bonds. Very few of the others invest that much in
developed markets, and most don’t own bonds. Still,
a good number of geographically flexible diversified
emerging-markets funds regularly invest
15%
or more
of their stock portfolios in developed-markets compa-
nies with ample business in emerging markets. Many
such funds do not intentionally go out of their way
to ensure their portfolios consistently have a certain
amount of developed-markets stocks. Rather, the
managers include a few developed-markets
companies in their portfolios because they meet their
investment criteria, and the emerging-markets
component of these firms’ business is sizable.
These funds have different percentages of assets in
developed markets, and their styles and strategies
distinguish them in other ways, too. In other words,
having some assets in developed-markets-based
companies isn’t a complete strategy, just an aspect
of a fund’s approach.
Beyond the Big Names
For decades, investors who wanted to focus on small
or midsize companies in the U.S. have had plenty
of fund options from which to choose. Fund compa-
nies took their time venturing into the emerging-
markets arena, however. Nearly all of the more than
two dozen emerging-markets funds that focus on
small- and mid-cap stocks arrived on the scene after
2005
. (We define this subgroup as normally having
average market capitalizations of
$3
billion or below.)
Some have most of their portfolios in micro-, small-,
and mid-cap stocks, while others are quite willing to
include many large companies in their mix.
Besides the size distinctions, the funds also take
different strategic approaches. Not surprisingly,
small/mid-cap emerging-markets funds not only
perform much differently from conventional
diversified emerging-markets funds and indexes but
also from each other. In general, they typically
notch even greater gains than large-cap emerging-
markets stocks during rallies, and they often fall
further during downturns. Unlike geographically flex-
ible funds, therefore, these funds do not hold out
the prospect of damping volatility in a notoriously
volatile area—just the opposite.
Taking the Multiasset Approach
Another variety of emerging-markets fund that has
appeared in recent years is the balanced or multiasset
portfolio. Instead of investing all or nearly all of their
assets in stocks, these funds also allocate assets
to emerging-markets bonds, and some add an extra
twist by making currency plays or other investments.
The Wild World of Emerging Markets
Morningstar Research
|
Bill Rocco and Gregg Wolper