Going global with emerging markets

With their high prospects for growth, some analysts see international stocks leading a global rebound.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Beth Kowitt, reporter

Photos
10 countries, 10 solutions
A financial crisis has engulfed countries from the best-off to the worst-off around the world. The solutions to the problem are varied.
Are homes affordable where you live?
  • Yes, thanks to the housing bust.
  • Yes, always have been.
  • No, they're still too pricey.
CDs & Money Market
MMA 0.39%
$10K MMA 0.35%
6 month CD 0.38%
1 yr CD 0.70%
5 yr CD 1.51%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- The numbers are in, confirming what many already suspected: Emerging markets are the flavor of the month (or at least the quarter).

EPFR, which tracks global fund flows, reported that during the second quarter, combined emerging market equity funds took in a record $26.5 billion, beating the previous high for a single quarter (the fourth quarter of 2007 with $22.4 billion).

"Emerging market funds have done particularly well in the rebound," says Bill Rocco, senior fund analyst at Morningstar. "There's talk out there that they're going to lead the recovery."

Part of their appeal, says Simon Hallett, chief investment officer of Harding Loevner, is that with developed economies in financial turmoil, emerging markets offer the possibility of faster growth and more financial security thanks to less debt lurking.

"This is a big change," said Hallett in an email. "In the past, they were considered very risky, but it was widely assumed (at least periodically) that investors got paid for taking that risk. Now they appear to have safe-haven status as well as offering the traditional prospect of more growth."

Before stepping into emerging markets, Morningstar's Rocco says most investors should recognize that they likely already have exposure through global equity, natural resources, and core foreign funds. Investors might also be in emerging markets indirectly if they invest in large global companies with operations in the developing world.

While he wouldn't give an exact percentage that investors should allocate to emerging markets, Rocco said it should be "small but significant."

His key piece of advice: Most investors are better off in funds that cover broad geographic ranges instead of specific regions in order to achieve a more balanced portfolio.

"The smaller your geographic region, you're completely vulnerable to a blowup in a given area," he says.

Emerging markets are what Rocco calls "lumpy," meaning they lack sector breadth and are instead concentrated in specific areas such as energy, metals, or banking. So investors may be compounding their risk if they're in a fund that focuses on a particular region on top of lacking sector balance.

If investors do want to concentrate on a particular area, Rocco recommends Asia -- already a huge focus of emerging market funds. He says Asia-centric funds are broader and have more markets and market cap than those that are country or region-specific.

For a regionally diversified fund, Rocco points to T. Rowe Price Emerging Markets Stock (PRMSX), which has a 1.24% expense ratio. It had a rough year (down about 34%), but is up 37% since the start of January, beating out its category's 30% total returns. It also has a solid five-year track record (up 13%). Top holdings include Mexican telecom America Movil (AMX) and Beijing Enterprises Holding, which runs a variety of businesses from beer production to toll roads.

Investors looking for a more conservative emerging market fund might want to consider American Funds New World (NEWFX), says Rocco, which also looks at multinational companies doing business in developing economies.

"It's not going to do as well in an emerging market rally, but it won't fall as far in a sell-off," he says. "It's a conservative way to play the region."

The fund is up about 22% on the year and 11% over five years. Like the rest of its category it took a hit over a one-year period, down about 27%, but its category's almost 31% decline. The fund has a 5.75% sales charge and a 0.95% expense ratio.

American Funds New World holdings include Belgian brewer Anheuser Busch InBev, Russian natural gas producer Gazprom, and Israeli pharmaceutical company Teva (TEVA).

Hallett's Harding Loevner Emerging Markets (HLEMX) also gets a nod from Rocco for what he calls its "good, sensible, high-quality growth strategy." It has a solid long-term track record (up about 13.5% over five years), even though it's down about 30% over a one-year period. It has a 1.61% expense ratio.

Investors should be forewarned that emerging markets have a long history of hot and cold streaks as investors pile in once they start going up and quickly flee when they spot trouble. Their popularity may already be waning. EPFR reported outflows for emerging market equity funds in two of the last three weeks through July 8.

"Aggressive funds in general have this problem, thinking they can time the market," Rocco says. "People focus on what's hot. They want to buy them after they're big." To top of page

Company Price Change % Change
Bank of America Corp... 16.92 0.11 0.62%
Apple Inc 99.27 0.09 0.09%
Facebook Inc 77.14 0.59 0.77%
Ford Motor Co 14.51 -0.08 -0.55%
Mylan Inc 48.25 2.98 6.58%
Data as of 10:26am ET
Index Last Change % Change
Dow 16,771.57 -33.14 -0.20%
Nasdaq 4,406.69 -15.40 -0.35%
S&P 500 1,941.19 -4.97 -0.26%
Treasuries 2.43 0.03 1.12%
Data as of 10:41am ET
More Galleries
Here are the 20 most ticketed cars in America The racy Subaru WRX tops the list, but some of the other ticket magnets will surprise you. More
Lamborghini to unveil 910 horsepower plug-in hybrid The Lamborghini Asterion concept car will have a V10 engine and three electric motors. More
The weapons of The Walking Dead Zombies are fiction, but the weapons on The Walking Dead are real. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.