It may be time to weed your U.S. stock portfolio and switch to emerging market funds.
 
The benchmark iShares MSCI Emerging Markets ETF   (EEM)  is down close to 30% in the past five years compared to a gain of almost 60% for the S&P 500 index. Emerging market stocks have started to turn the tide over the course of 2016, however. Year to date,  the EEM is up 4.5%, beating the S&P's return by more than 2 full percentage points.
 
"If you look at valuations right now, the U.S. market PE (price-to-earnings) is about 24 times, while emerging markets are only selling at about 18.5 times. So from a valuation and cyclicality perspective, it may be a time to reallocate to emerging markets," said Kevin Cooper, head of portfolio research at AMG Funds   (AMG) .
 
Cooper added that moving into foreign stocks may be a prudent move anyway, considering the fact that most U.S. investors are under-allocated to non-U.S. assets. Based on mutual fund investments, only 26% of U.S. investors are investing internationally, despite the fact that 56% of world market capitalization is outside the U.S.
 
"U.S. investors are more comfortable with the names they know and companies that are down the street or a neighboring state that they know very well," said Cooper. "The tide is starting to change, however."
 
Furthermore, Cooper pointed out that according to data from the World Bank, the population for developing countries is approximately four billion out of the entire global population of seven billion. Meanwhile, the working-age population in these developing countries is 3.5 billion, or approximately 75% of the world's working population.
 
Not all emerging market funds are alike  though. China is certainly a different marketplace than Russia and Brazil, for example. Cooper said AMG is a big proponent of active management in emerging markets, and the recent volatility has benefited active managers who can exploit the inefficiencies in those markets.
 
"China versus Russia versus Brazil, these are different marketplaces and very different animals," said Cooper. "You have less sell-side analysts covering these companies and much more inefficiency."

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