Why You May Want Emerging-Market Package
It’s perhaps fitting that emerging-markets mutual funds have started to gain a lot of attention in 1992, the 500th anniversary of Columbus’ voyage to America.
Like Columbus, the managers who run these funds are helping to expand people’s vision of the world. They’re bringing nations ranging from China to Chile within reach of investors who would encounter significant problems trying to buy stocks on their own in such places.
The funds are now focusing on Southern and Southeast Asia, the larger nations of Latin America and a few backwater European markets. Eventually, their reach will extend to even more exotic investment locales such as Eastern Europe, the Middle East and Africa.
Americans will find two compelling reasons to consider an emerging-markets fund: risk-reducing diversification and profit potential.
The diversification angle recognizes the fact that international markets don’t move in tandem with U.S. stock prices. As a result, many experts insist that you can actually reduce your overall volatility through a wider global exposure, even though many foreign markets are highly speculative by themselves.
“Even retired investors can justify some emerging-markets exposure,” says Ken Gregory, co-editor of the L/G No-Load Fund Analyst, a San Francisco newsletter. “But you should definitely view these funds as long-term holds.”
Diversification is fine, but profit potential is the more important reason to consider such funds. Many developing countries are outstripping the wealthier nations in terms of economic growth rates.
“Emerging markets have 83% of the world’s population, 16% of gross national product, but just 6% of stock-market capitalization,” says Christian Wignall, head of international investing for the G. T. Global mutual funds group in San Francisco. “These countries have a shortage of everything.”
Emerging economies are growing in the range of 7% to 9% a year, compared to 2% to 3% annual growth among the developed countries, according to Montgomery Asset Management, another San Francisco fund group.
Historically, high economic growth has translated into superior investment performance. Since 1985, 15 of the 20 developing countries tracked by Washington-based International Finance Corp. have seen their stock markets surge 100% or more within a single year.
Capitalism is no longer a dirty word in much of the developing world, as more countries drop trade and investment barriers and turn increasingly to the private sector to take over state-run industries.
Even political risk is on the wane in some places, considering that five Latin American countries have shifted from military regimes to democracies within the last decade, according to Montgomery Asset Management’s count.
At G. T. Global, which runs four equity-oriented funds with at least some emerging-markets exposure, the focus is on China. “This is the most exciting developing-country story we’ll see this century,” Wignall says.
Because China’s stock markets are still relatively small and illiquid, G. T. Global is mostly making its investment play through Hong Kong. Many Hong Kong-based companies have sizable manufacturing or marketing operations on the mainland. And with Hong Kong stocks trading at modest price-earnings ratios of 10 to 12, Wignall figures that the political risk of China’s 1997 takeover of the British colony has been amply factored in.
Montgomery Emerging Markets has a 4% stake in China via Hong Kong, but its largest holdings are in Thailand, Singapore, Malaysia, the Philippines and Mexico--each accounting for about 8% to 9% of fund assets.
Both Montgomery Emerging Markets (no load; 800-428-1871) and G. T. Global Emerging Markets (4.75% maximum load; 800-824- 1580) debuted this year. Other funds include G. T. Latin America Growth and G. T. Global Telecommunications (4.75% maximum load; 800-824-1580), Lexington Worldwide Emerging Markets (no load; 800-526-0056), Merrill Lynch Latin America (4% maximum load; contact local office), Newport Tiger (5% maximum load; 800-776-5455) and T. Rowe Price New Asia (no load; 800-638-5660).
So much for the open-end choices.
You can also select from a couple dozen closed-end portfolios that concentrate on emerging markets, usually with a single-country focus. Closed-end funds offer much-needed diversification and professional management. But unlike their open-end cousins, they issue a set number of shares, and these shares trade like regular stocks on U.S. exchanges.
Closed-end managers don’t have to worry about meeting shareholder redemptions. That gives the funds a more stable asset base, and it makes the portfolios better suited to invest long term in the illiquid markets that characterize most emerging economies.
Unfortunately, several of the closed-end portfolios are now selling at premiums to their net asset value or per-share worth, Gregory notes. Templeton Emerging Markets, for example, lately has been trading about 20% above its NAV, which means investors are paying $1.20 for every $1 in assets.
“In concept, closed-end funds are the better alternative,” says Gregory, who recommends a 10% to 15% emerging-markets weighting for most equity-oriented investors.
“But you can still get it done with open-end funds.”
Emerging Markets’ Sizzling Stocks
Stock markets in developing countries have boomed in recent years, helped by lower inflation, pro-capitalist policies, liberalized access for foreign investors and other factors.
This chart shows returns for 17 emerging markets in five continents for the seven years ending in 1991. U.S. stocks rose 219%, or 18% a year, over the same period.
Although the sizzling gains achieved by several developing countries aren’t likely to continue, emerging markets as a group still appear to offer superior growth potential.
Total Average return annual Country (1985-91) return Chile +2,832% +62.0% Mexico +1,948% +53.9% Argentina +1,917% +53.6% Philippines +1,764% +51.9% Colombia +1,555% +49.3% Zimbabwe +852% +38.0% Venezuela +838% +37.7% Thailand +798% +36.8% Greece +678% +34.1% Taiwan +611% +32.3% Pakistan +462% +28.0% South Korea +408% +26.1% India +241% +19.1% Malaysia +94% +10.0% Brazil +78% +8.6% Jordan +37% +4.6% Nigeria -1% -0.1%
Source: Emerging Stock Markets Factbook, International Finance Corp.
