Hunting for a Smoother Ride in Rough Emerging Markets

NEW YORK (TheStreet) -- Emerging markets have taken investors on a rough ride. During the past three years, emerging markets mutual funds lost 1.7% annually, while the S&P 500 gained 14.8%. Emerging market index funds did poorly: Vanguard Emerging Markets Stock Index Fund (VEIEX) was down a total of 14.7% over the last three years.

After this weak showing, many markets now sell at modest prices. The portfolio of the average emerging markets fund has a price-to-earnings ratio of 13, compared to 19 for the S&P 500. But before you try bargain shopping, keep in mind that many markets could remain choppy. In the past year, countries in Latin America and Asia have been plagued by weakening currencies and slowing economies. Vladimir Putin's move into Crimea added an extra note of uncertainty.

To limit risks, consider funds with track records for delivering relatively steady results in the difficult markets. Solid choices include Amana Developing World (AMDWX), Brandes Emerging Markets (BEMAX) and Virtus Emerging Markets Opportunities (HEMZX). All three funds have used distinctive strategies to excel during the downturns of recent years.

Virtus Emerging Markets ranks as one of the least risky options. The fund outdid 98% of peers in 2011, a year when fears about slowing growth in China sent emerging markets tumbling. During the past five years, Virtus returned 16.5% annually, surpassing its average peer by 3 percentage points.

The Virtus portfolio managers avoid trouble by focusing on very high quality stocks. Holdings must have high returns on equity, little debt and dominant market shares. The managers hold few energy companies, which could produce erratic profits as global markets change. Instead, Virtus prefers champion consumer stocks that can deliver increasing earnings year after year.

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