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
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.
One more selling point: Emerging markets don't move in tandem with U.S. stocks, so funds in this category provide nice diversification.
For investors interested in international exposure in more mature markets, we discussed solid
overseas funds. Also, for folks looking to tap Asia specifically, check out
this recent article.
Without further ado, here are this week's diversified emerging markets funds.
1. Dreyfus Premier Emerging Markets
The $498 million-in-assets
Dreyfus Premier Emerging Markets fund has undergone a few changes recently: It added Premier to its name and it added a sales fee.
While the sales fee is a disappointment, all of the ingredients that have made this fund a winner -- strong manager, value discipline -- remain intact. Running the fund since its 1996 inception, manager Kirk Henry has led Dreyfus Premier Emerging Markets to returns in the top fifth of his peers in four of his six years. The other two years he was in the top 42%, according to Morningstar. The fund is up 5.04% a year on average over the past five years, good enough to rank in the top 4% of its category.
Henry looks for companies whose stocks appear to be value plays compared with global peers, and he sells once they no longer fit the criteria. His aversion to riskier fare means the fund may lag behind during woolly runs in emerging markets, but his steady performance speaks for itself. The fund has sizable bets in India and Mexico, relative to the benchmark EAFE-IMF index, with
Telefonos de Mexico
and India's Reliance Industries turning up in the top 10 of the fund's 133 holdings.
The fund sports an expense ratio of 1.83%, below the 2.03% category average, according to Morningstar.
2. Eaton Vance Emerging Markets
Jacob Rees-Moog took the helm of the
Eaton Vance Emerging Markets in May 2000, and has navigated the emerging-markets waters most adroitly.
Over the past three years, the fund is off 2.03% a year on average, ranking in the top 8% of its peers and beating the benchmark by 11.4 percentage points a year.
Rees-Moog looks for growth-oriented stocks with an eye on reasonable valuations and has made winning bets on gold-mining stocks around the globe, especially South Africa's
Harmony Gold Mining
. He appears to have lightened up on his gold holdings recently. (
Click here for a recent 10 Questions interview with Rees-Moog.)
The fund carries a sales charge as well and sports an above-average expense ratio of 3.26%.
3. T. Rowe Price Emerging-Markets Stock
If you are interesting in slightly racier fare, the
T. Rowe Price Emerging Markets Stock fund is worth a look.
The four-person management team -- three at the helm since 1995 -- have about 23% of the portfolio invested in tech and telecom, including Indian tech-outsourcer
. Like most funds in the category, it has experienced a bumpy ride, but its five-year average loss of 1.27% puts it in the top 24% of its peers, according to Morningstar.
While emerging markets can be a tricky place and the heavier bets in tech and telecom make this fund a bit risky for the conservative investor, T. Rowe Price is a firm that maintains a fairly high level of quality over its offerings.
Also helping matters: The no-load fund sports a 1.51% expense ratio, below its category average.
4. Oppenheimer Developing Markets
Oppenheimer Developing Markets fund, managed by Rajeev Bhaman since 1996, has been a solid performer on the upside, and its downside hasn't been too shabby either.
The $480 million fund's 5.06% average annual return over the past five years ranks in the top 3% of its peers. Bhaman looks for growth at a reasonable price, and he thinks he has found it in India: The country makes up 21% of the fund's holdings, according to Morningstar. The majority of the companies in the portfolio are mid-cap offerings.
The fund does carry a sales charge, and the expense ratio is 1.77%
5. Indexers Choice: Vanguard Emerging Markets Index
All those heavy loads and hefty expense ratios got you down about prospecting in emerging markets? Well, the folks at Vanguard have an alternative for you.
The $1.04 billion
Vanguard Emerging Markets Stock Index fund carries no load and its expense ratio is a trim 0.6%. Meantime, the fund aims to mirror the performance of the MSCI-EMF index. Its five-year average return of negative 1.56% ranks it in the top 26% of its peers.