Ecuador Crisis Didn't Inhibit Emerging-Market Debt Funds

Also, a hot European fund, an update on Chinese trade negotiations, and Canadians blast back.
Author:
Publish date:

Recent reader letters and questions for Global Portfolio span the world.

First, a somewhat historical question from

Kirn Dhaliwal

of Edmonton, Alberta, Canada, who asks about Ecuador's default on

Brady bonds last October. "If these bonds were backed by U.S. zero-coupon bonds, how was a default possible?"

Well, because Ecuador didn't pay its debts. OK, I'm being glib. Just because the bonds are backed by U.S. Treasuries does not necessarily mean that creditors will want to redeem them. If they do so, they will receive much less of their money than if they try to renegotiate a repayment schedule with the Ecuadoran government. That is, in fact, what has been happening the last few months. A deal between the government and its creditors so far has failed to materialize, but one may occur later this month.

The situation in Ecuador is worth bringing up for more than academic trivia. The nation may be of little interest to U.S. retail investors, but its default last year was significant. While Ecuador's economic woes have not been good for the country or its citizens, the nightmare scenario of contagion envisioned by many never developed. The default did not trigger wider economic panic in the region or globally, as occurred after the Thai

baht

crisis in 1997. We somehow turned a corner with Ecuador's default.

Nonetheless, one would think, following Ecuador's default that investors would be at least a little wary of investing in emerging-market debt. In fact, emerging-market debt mutual funds have been pretty strong performers this year. The

(GMCDX) - Get Report

GMO Emerging Country Debt fund is up 11% year to date, and has 55% of its assets in Latin America. However, because it requires a cool $1 million initial investment, it's probably of limited interest to all but the wealthiest of individual investors. Within more reasonable reach is the

(JEMDX) - Get Report

J.P. Morgan Emerging Markets Debt fund, which has risen 7.3% this year and has 65% of its assets in Latin America. It requires a $2,500 initial investment and carries an expense ratio of 1.25%.

Elsewhere around the world: I wrote

recently about the

(MEUEX)

Deutsche Asset Management European Equity Fund, formerly the

Morgan Grenfell European Equity Growth Fund

. It is the best-performing mutual fund in any category, up 101% this year, but has a minimum investment of $250,000. A reader notes that "Deutsche Asset Management has launched an investor class" of this fund with the ticker MEUVX, which can be bought for as little as $2,500.

True enough, such a fund was started last December. Thanks for bringing it to my attention. However, although both have the same allocations of holdings, there are some key differences between the two. The

(MEUVX)

Investment Class version of this fund has a 1.5% expense ratio compared with the 1.25% expense ratio of the tonier institutional version. The difference between expenses explains the disparity between performance of the two funds, according to Kunal Kapoor, an analyst at

Morningstar

. The investment class version is up 91.4% this year, compared with the institutional version's 101%. In this market, that's still pretty darn impressive, of course.

Moving on,

Scott Pickerill

asks when the

Senate

will vote on the bill granting China normal trade relations and when the country will enter the

World Trade Organization

.

Interestingly, the momentum on the bill has now stalled. Senate majority leader

Trent Lott

has held up movement on it until the Senate concludes some key spending bills. Some observers are now predicting it won't go before the Senate before the August recess. China should enter the trading group some time in the fall. Will there be a market dip in China creating a buying opportunity for those companies that list in the U.S. if passage in the Senate appears in doubt? Quite possibly.

Finally, Canada. I received a barrage of criticism from readers for my

comments about Canada's inferiority complex, which were perceived by some as snide. Here's a sampling.

Keith Eadie

: "That is so arrogant it is almost too typically American."

Olly Schmitz

: "I for one have no inferiority complex when it comes to comparing Canadians with Americans. For me it is just the opposite. I believe Americans are inferior. ... The comments you wrote contribute to the feeling I get that you Americans are far too full of yourselves." And my favorite, from

Dr. Aseem Kumar

: "This is such arrogant bull**** propaganda uttered by a typical American hypocrite."

I believe you've proved my point.

David Kurapka's Global Portfolio column appears Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

dkurapka@thestreet.com.