Another cautious fund is Thornburg Developing World (THDAX). Portfolio manager Lewis Kaufman sometimes takes blue chips that are based in the developed countries but derive most of their profits from the emerging markets. The aim is to find low-volatility companies that are benefitting from the rapid growth of the developing world. The fund started in late 2009, and so far the results have been promising. In 2010, the fund outdid 99% of emerging market funds, and last year Thornburg outdid 84% of peers.
A holding is Colgate-Palmolive (CL), which derives most of its earnings from the emerging markets. The company dominates toothpaste markets in Mexico, and is a leading player in Brazil. "Colgate shares have delivered about the same returns as the emerging markets--but with less volatility," says Kaufman.
He also likes Schlumberger (SLB), the oilfield services giant. The company is a leader in assisting offshore drilling in Latin America.
To deliver steadier results in the emerging markets, several companies recently introduced balanced funds, which hold mixes of stocks and bonds. New entrants include Dreyfus Total Emerging Markets (DTMAX) and Lazard Emerging Markets Multi-Strategy (EMMOX). The fixed-income holdings provided an important boost last year when emerging markets bond funds returned 2%.Dreyfus portfolio manager Alexander Kozhemiakin says that he can put up to 80% of his assets in equities. He currently has 58% in stocks. "We want to keep some powder dry because of the uncertainty in Europe," he says. Kozhemiakin says that emerging market bonds are attractively priced. Many investment-grade issues yield 7%, an appealing payout at a time when 10-year Treasuries yield 2.05%. He favors bonds from Mexico. Because of anemic growth in the U.S., the Mexican economy should remain sluggish. That should prevent interest rates from rising, a process that can hurt bond prices.