Brazil, India and Turkey emerge

brazil_india.top.jpg By Tim Gray, contributor


(Fortune) -- The pros' advice couldn't be plainer: Investors need exposure to the regions outside the United States where more and more of the world's economic growth will be found in the years ahead. Yet most Americans stick close to home. Less than a third of the savers in Vanguard's retirement plans invest in international stock funds when they're available, according to a recent study by the mutual fund giant. Even fewer, one in 10, put money in emerging-markets funds -- that is, those specializing in developing countries such as Brazil, China, and India.

Granted, investing abroad at the moment feels scarier than vacationing in Baghdad. From Greece to Spain and beyond, Europe has been enduring a financial crisis so severe that it threatens to unravel the common currency known as the euro. In the best case, Europe faces a period of slow growth as it tidies its finances. On top of that, China -- supposedly this century's engine of global growth -- looks troublesome too.

That's why prudent investing in emerging markets is more important than ever. The wisest strategy is the safest and the broadest: Put a modest sum in a multicountry emerging-markets fund, says Rich Evans, a professor of business administration at the University of Virginia whose research examines investment decision-making. "In an optimal portfolio for somebody who has an average risk tolerance," he says, "you could expect to see 5% to 10% emerging markets."

The Vanguard Emerging Markets Stock Index Fund (VEIEX) offers a broad cross section: It typically holds shares of about 850 companies across the globe and charges a rock-bottom expense of 0.4%. Over the decade ended April 30, it averaged 11.2% annual returns. For fans of actively managed funds, a highly regarded option is T. Rowe Price Emerging Markets Stock Fund (PRMSX), run by Gonzalo Pangaro. It focuses on industry leaders with strong earnings but reasonable prices. In Brazil, that approach has led Pangaro to Petróleo Brasileiro (PBR), the giant oil and gas company, and Vale (VALE), one of the world's biggest producers of iron ore. At the end of the first quarter he had parked about 17% of the fund's assets in Brazil and 9% in India, with another 18% in China. (The Vanguard fund has a similar weighting among those three countries.) Over the past 15 years the T. Rowe Price fund has returned an average of 10% a year, beating 80% of its peers. Its expense ratio, while not dirt cheap at 1.32%, is well below the average of 1.8% for emerging-markets funds followed by Morningstar, the investment-analysis company.

If you already have such a holding, putting a small amount in a single-country mutual fund or an exchange traded fund (ETF) can boost returns, although it's crucial to remember that when it comes to these markets, higher rewards mean higher risk. Here are three to consider:

Brazil: Discipline in a land of plenty

What happens when you elect a leftist labor leader as President? You get a revolution. In Brazil's case, that meant a market revolution that has energized the country's economy and is delivering 6% annual growth. Luiz Inácio Lula da Silva, known as Lula, took office in 2002 and undertook a wave of pro-market reforms, ensuring the independence of the central bank, restraining the budget deficit, and avoiding the dreaded "resource curse" to effectively exploit the country's oil and other natural resources. Finally, Brazil's 10-year-old Novo Mercado stock exchange "has greatly tightened up corporate-governance rules to protect investors," says Chris Alderson, president of T. Rowe Price International. One way to profit from the country's growth is iShares MSCI Brazil Index Fund (EWZ), an exchange-traded fund (which is bought and sold like a stock). This one holds shares of about 80 of the largest Brazilian companies and comes cheap, with an expense ratio of 0.65% (iShares, an arm of BlackRock, generally offers the lowest-fee ETFs for individual markets). The Brazil fund has returned 30% a year, annualized, over the past five years.

India : The young Asian powerhouse

"India has fabulous demographics," says Alderson of T. Rowe Price. Some three-quarters of the population are under 30, which creates a virtuous cycle as people get educated, land good jobs, spend, and invest. "India has 250,000 students coming out of top-quality business schools every year," Alderson says. "It's like Silicon Valley in the U.S. -- lots of smart young guys who are very entrepreneurial." By contrast, developed economies, especially in Japan and Western Europe -- and even China (because of its one-child policy) -- will be burdened by aging populations and shrinking workforces. The iShares S&P India Nifty Fifty Index Fund (INDY) is young too -- the ETF started late last year -- but its stakes in the largest 50 companies trading on India's National Stock Exchange give investors a taste of that economy. The fund has an expense ratio of 0.89%.

Turkey: The world's crossroads

Finally, if you have some money you're willing to put at risk -- it shouldn't be more than a tiny part of your portfolio -- Turkey looks to be one of the more promising "frontier" markets. The International Monetary Fund estimates that the nation's economy will grow 5% this year. The Turks are "low-cost manufacturers," says Rusty Johnson of Harding Loevner, a money-management firm that specializes in international investing. He notes that the country's central location gives its companies excellent access to markets in Western Europe, Russia, and the Persian Gulf. The iShares' MSCI Turkey Investable Market Index Fund (TUR), launched in 2008, typically holds about 90 companies and carries an expense ratio of 0.65%. Last year it rose 108%. No matter how good the prospects, investing in the developing world isn't for the meek; periodic plunges are inevitable. "Emerging markets over the last 10 years have been a volatile ride, and I don't think that's going to change," says Pangaro of T. Rowe Price. But for all the bumps, the ride can still be worth it. To top of page

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