(PUB) Investing 2016

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11 Morningstar FundInvestor July 2016
The recent emerging-markets bear market has left
its imprint, at least in the short term, on the Morning-
star 500. Between the bear markets’ April 28, 2015,
peak and its Jan. 21,2016, trough, the MSCI Emerging
Markets Index shed 34.1% of its value, with Brazil
and China leading the race to the bottom. While their
reasons for selling differed, two funds substantially
cut their developing-markets footprints during that
time and still got hammered. Two others had the
temerity to buy in bulk, though only one benefited
from the subsequent rebound through May 2016.
At the start of second-quarter 2015, Artisan Interna-
tional Small Cap ARTJX had a 31% emerging-
markets stake (including South Korea and Taiwan),
ranking second out of roughly 40 foreign small/
mid-growth Morningstar Category peers and was 13.4
percentage points more than the MSCI All-Country
World Ex-USA SMID Growth Index. More than four
fifths of that exposure, though, was concentrated in
seven Chinese stocks. One year later, longtime
manager Mark Yockey had sold all of them, with most
of the selling taking place in 2015’s fourth quarter.
Some of these stocks had been big winners for the fund
in prior years. China Oil & Gas Group, however,
proved costly; it was a big loser while the fund held it.
Through May 2016, the fund’s 6.6% loss over the
past year trails the benchmark by 3 percentage points
and places in the category’s bottom quintile. Short-
term underperformance is to be expected here, though.
Yockey goes his own way in managing this closed
fund’s roughly 35- to 50 -stock portfolio, and he’s built
a superior long-term track record doing so.
Between June and December 2015, Columbia Acorn
International ACINX, with a Morningstar Analyst
Rating of Silver, slashed its emerging-markets expo-
sure by 13.2 percentage points to 17.8% of assets,
near where it has remained since. Deteriorating funda-
mentals and underperforming small caps drove the
steep drop, but management was also mindful of the
emerging-markets weighting of the MSCI All-Country
World Ex-USA SMID Index, which became the fund’s
new benchmark at the start of 2016. Selling too late in
a downturn didn’t help. Its 7.6% one-year loss through
May 2016 ranks near the foreign small/mid-growth
category’s bottom decile. Managers Louis Mendes
and Zach Egan, however, have earned investors’ trust.
They continue to use the same growth-driven and
quality-oriented approach that has helped this fund to
a peer-beating record since their May 2003 start date.
Over the past year through March 2016, Bronze-rated
Manning & Napier World Opportunities EXWAX
hiked its emerging-markets weighting by 10.3 percent-
age points to 25.6% of assets, which was higher
than 95% of its roughly 200 foreign large-blend cate-
gory peers. The shift toward the developing world
was not indiscriminate. The fund sold several emerging-
markets stocks during that time (Life Healthcare
Group Holdings LHC and LATAM Airlines Group in
June; Charoen Pokphand Foods in September;
and Qihoo 360 Technology QIHU in November) and
trimmed several positions. It added three names in
such volume that the fund’s emerging-markets stake
grew significantly: China’s Baidu BIDU (April) and
Shandong Weigao Group Medical Polymer (May),
and South Korea’s Samsung Electronics (November).
By March 2016, these three stocks accounted for
8.2% of assets. While the fund lost 9.2% over the
trailing year through May 2016, it still placed in
the category’s top half. It has fared especially well
in the emerging-markets rally since late January,
though it’s vulnerable to another downturn.
AMG Yacktman Focused Service YAFFX bought
preferred shares of Samsung in 2015 ’s second
quarter and added more in the third. Samsung is
now the fund’s second-biggest holding. It and a
modest position in China’s Hengan International
Group account for the fund’s 12.4% emerging-
markets stake as of March 2016, which was the third-
most out of 450-plus large-blend category peers.
The fund posted a top-quintile 1. 8% gain over the
past year through May 2016, but neither Samsung
nor Hengan drove that outperformance. K
Contact Alec Lucas at
Funds Making Big Emerging-
Markets Bets
Red Flags | Alec Lucas
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks. Such
risks can take many forms,
including asset bloat, the
departure of a solid manager, or
a focus on an overhyped asset
class. Not every fund featured
in Red Flags is a sell, and in fact,
some are good long-term
holdings. But investors should
be prepared for a potentially
bumpier ride in the near future.