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Emerging market funds eyed
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February 10, 2000: 6:26 p.m. ET
Sector's long-term forecast is good despite looming U.S. interest rate hikes
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - Prospects for the highly volatile emerging markets sector are encouraging in the long run, but rising interest rates in the United States could put a damper on short-term mutual fund performance, a top manager said.
Mark Mobius of Templeton Developing Markets Fund, said the sector won't get "the spectacular increases that we saw last year, especially if interest rates in the U.S. continue to increase." Emerging market funds were up an average of 72 percent in 1999, according to fund-tracker Morningstar.
Just last week, the Fed raised short-term rates a quarter of a percentage point, and industry analysts say more hikes probably are on the way.
Also in this column: The first overseas socially responsible mutual fund for U.S. investors debuts.
But Mobius noted that many emerging markets are in a recovery, which bodes well for the sector. Strong economic growth is expected in Latin America, and many Asian markets are gearing up for GDP growth of six percent to nine percent this year, added Morningstar senior analyst Bill Rocco.
Mobius' Templeton fund, at $2.95 billion, is down 4.6 percent year to date as of Feb. 9, compared to last year's 51.6 percent. Some of the fund's core holdings include the American Depositary Receipt Telefonos de Mexico (TFONY: Research, Estimates) and Korea Electric Power (KEP: Research, Estimates).
Because of their high-risk factor, emerging market funds aren't for everyone. Investors with a stomach for volatility must discipline themselves to invest for a 15-to-20 year horizon, and should brace for possible short-term losses but the prospects of longer-term gains, Rocco said.
"They're really only for the aggressive investor who can handle a lot of volatility," he said.
London-based Friends Ivory Funds is tapping into U.S. investors' appetite for socially responsible funds.
On Wednesday, Friends Ivory introduced the Friends Ivory European Social Awareness Fund (FIESX), which invests primarily in large European growth stocks, and the Friends Ivory Social Awareness Fund (FISWX), which invests in large-cap U.S. stocks. The two no-load funds will be distributed by SEI Investments Co. in Oaks, Pa.
The European fund, with holdings like mobile phone service provider Vodafone AirTouch PLC (VOD: Research, Estimates) and drug maker SmithKline Beecham PLC (SBH: Research, Estimates), is the first European socially responsible fund open to U.S. investors, according to Friends Ivory president George Walker.
The funds screen out management practices such as investing in tobacco, alcohol, or weapons-related securities. The funds also look for companies that support human rights and diversity in the workplace, Walker added.
"We look at companies with an eye on environmental issues, those that promote equal opportunity in the workplace, good human rights records and those that make safe products," he said.
For example, French semiconductor maker ST Microelectronics (STM: Research, Estimates), one of the European Social Awareness Fund's core holdings, has been active in protecting the environment.
The Social Awareness Fund, with core holdings such as Microsoft (MSFT: Research, Estimates) and Home Depot (HD: Research, Estimates), uses the S&P 500 Index as a benchmark.
And there seems to be a growing trend among mutual fund companies to introduce socially responsible portfolios to Americans. Morningstar currently tracks 55 socially conscious funds, up from 23 at the beginning of 1994.
But aside from the socially conscious bent of the fund, Walker hopes Americans see the merit in investing overseas.
"As European economies are doing better and the rebirth of the euro, cross border mergers will become more prevalent," strengthening the growth of those companies, Walker said. 
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