Emerging-Markets Funds Beckon Anew--but Look Before You Leap
Just when you thought it was time to give up on emerging-markets stock funds forever, here they come, roaring back.
Great.
But now we’re torn. Do we turn our backs on an asset class that has teased us for so long, only to disappoint us in eight of the last nine years? Or do we run back into its arms at the first sign of good news?
A small but noticeable number of investors have already chosen to do the latter in the last four weeks.
And it’s easy to see why. Just five months into the year, on news of a nascent recovery in the global economy, the average diversified emerging-markets mutual fund has surged an impressive 27.6%. By comparison, the average domestic stock fund is up just 9.3%.
And since February, Templeton Developing Markets, Mark Mobius’ fund, is beating a number of Internet funds (such as Munder Net Net) and large growth funds (such as Janus Twenty) by more than double.
It’s enough to make you think back to 1993, when the average emerging-markets fund gained more than 73%, or 63 percentage points more than the benchmark Standard & Poor’s 500 index of big U.S. stocks.
The question is, is it enough to make you forget that over the last one, three, and five years, the typical emerging-markets fund has lost money?
Just four short months ago, Brazil’s currency plummeted, threatening yet another round of global instability. But here we are in May, and Latin American and Asian stocks are posting Internet stock-like gains.
What changed?
The weakness in Latin American and Asian currencies made their exports that much more attractive to U.S. consumers, Templeton’s Mobius argues. And fortunately, U.S. consumer spending and confidence rose just in time to pick up those bargains--and to help prop up those economies.
“A lot of these countries are export driven, and as long as the U.S. is able to absorb these exports, their foreign exchange reserves go up,” which bolsters their currencies and their economies, Mobius says. It’s what he calls a “virtuous circle.”
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Is it sustainable?
Wall Street certainly thinks so.
According to a just-completed KPMG survey of economists and strategists at 61 leading investment firms, the consensus is that emerging-markets stocks should deliver annualized gains of 12.9% a year for the next five years.
By comparison, large U.S. stocks are expected to gain a little more than 7.6% a year for the next five years.
“Right now, the conventional wisdom is that emerging markets will be improving and that over the next five and 10 years, it makes sense to commit some portion of many investors’ portfolios to that area,” says Neil Wolfson, national partner in charge of KPMG’s investment consulting group.
John Rekenthaler, director of research for the fund tracker Morningstar, is a bit more direct.
“The bells are ringing for us to get back in,” he says.
OK. But before you jump, remember that when they’re good, emerging-markets stock funds can be great. But when they’re bad, they can be downright terrible.
As evidenced by the fact that Templeton Developing Markets had a sensational 75% surge in 1993 but has delivered cumulative gains of just 85% from the beginning of 1993 to the present. That compares with a rise of 252% in the S&P.;
Sharp short-term losses--such as the fund’s 35% fall from the end of September 1997 to mid-January 1998--erased most of the spectacular gains along the way.
Which is why even Mobius, one of the nation’s biggest advocates of emerging-markets investing, thinks one can (and may want to) trade emerging-markets funds rather than buying them to hold.
That’s “if you have the stomach for it,” he said. “If you can time it, great.”
“Though we don’t like to advise trading, the reality is that emerging markets have much shorter cycles than the U.S., for example,” he said.
Indeed, over the last 30 years, emerging markets have gone through five distinct bull markets. That means they’ve also gone through five distinct bear markets in which they’ve lost, on average, an annualized 43%.
In Mobius’ own fund, all of the gains achieved between January 1994 and September 1997 were wiped out in the six short months that followed. In fact, investors in Mobius’ fund are only now beginning to show a net cumulative gain from that point.
Which is why Sheldon Jacobs, editor of the No-Load Fund Investor newsletter, argues: “There are some asset classes that I think you ought to always have in your portfolio. There are others, I believe, that you should view a little more opportunistically.”
Like emerging markets.
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Eighteen months ago, for example, at the height of the Asian currency meltdown, Jacobs reduced the emerging-markets allocation in his “aggressive” model portfolio from 5% to nothing.
He ventured back into the sector only two weeks ago, with a 5% weighting in an Asia Pacific fund.
By taking this tack, Jacobs missed most of the run-up thus far this year in emerging-markets stocks. But he also missed the tremendous run-down from the fall of 1997 to the end of 1998.
Mobius recommended buying a bit earlier. For instance, one of the reasons his fund is outperforming its peers this year is that he was a net buyer of beaten-down emerging-markets stocks in 1998, when there was still blood in the streets, so to speak.
As for when to get out?
Mobius says one approach is to mimic what many stock traders do, which is to set a de facto stop-loss order on the fund.
In other words, “you say, ‘If the fund goes down this much, I’m out,’ ” he says. And as the market rises, you keep adjusting that stop-loss up with it.
If that’s what you want to do, where should you start?
Rekenthaler and others suggest going with a diversified emerging markets fund. Why? “You never know who’s going to be assassinated,” he said. “You never know which finance minister in which country or region will resign abruptly.”
The reality is, there aren’t that many diversified emerging-markets funds that have a long-term track record. But here are four that do:
* Templeton Developing Markets (5.75% load; minimum initial investment: $1,000; [800] 342-5236).
* SSgA Emerging Markets (no load; minimum initial investment: $1,000; [800] 647-7327).
* Wachovia Emerging Markets (4.5% load; minimum initial investment: $250; [800] 994-4414).
* Putnam Emerging Markets (5.75% load; minimum initial investment: $500; [800] 225-1581).
These funds have beaten at least half of their peers over the last one and three years. And they tend to avoid small emerging markets stocks, which are likely to suffer the most at the first sign of trouble.
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* Emerging-market funds with three years of history can be found with performance and other data, plus their Morningstar ratings, at https://www.latimes.com/fundsand401ks.
Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.
International investing will be one of several fund investing topics addressed at the Los Angeles Times Investment Strategies Conference May 22-23 at the Los Angeles Convention Center. For registration information, call (800) 350-3211 or visit https://www.latimes.com/isc.
