Five Winning Funds: The Re-Emergence of Emerging Markets

Emerging-markets funds have been among the worst and most volatile performers over the past five years. What are you waiting for, investors?

Seriously, folks: For this week's Five Winning Funds, we'll highlight a few solid emerging-markets funds. While the past performance numbers won't be pretty -- funds in the category are down 15.8% since May 1998 and 22% down since May 2000, according to Lipper, a Reuters Company -- the category is showing signs of life. There are compelling reasons to consider putting about 5% of your portfolio into an emerging markets fund.

First off, over the long haul, returns for the category are solid: Since 1988, the class has witnessed compound annual growth of 7.41% a year, as measured by Morgan Stanley Capital International's Emerging Markets index. Of course, the path of emerging markets never did run smooth. The past six years have witnessed the Asian contagion, the Russian banking crisis and devaluation and political-economic turmoil in key South America countries.

Things are starting to brighten. So far this year, the average emerging-market fund is up 6.28%, according to Lipper. More importantly, despite fears over SARS and North Korea in Asia, terrorism around the globe and lingering economic concerns over Argentina and elsewhere, many emerging markets are a lot more stable thanks to domestic reforms in the late 1990s. Burgeoning domestic economies such as South Korea's make the countries less reliant on exports to the U.S. And, of course, with the massive potential of China, emerging markets offer some growth prospects that are sorely lacking at home.

The regions are also offering another benefit not seen in the U.S.: Stocks are cheap. "I'm seeing many stocks with P/E ratios under 10 and dividend yields approaching 5%, which is almost always a good basis on which to invest," Jacob Rees-Moog, manager of the Eaton Vance Emerging Markets funds, said recently.