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Fund Spy

Borat Can Laugh, but Offbeat Markets Are No Joke to Funds

Managers are finding opportunities in once-obscure corners of the world.

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Perhaps the turning point came in August 2006, when  Vanguard Emerging Markets Stock Index (VEIEX)changed its guidelines

Up to that point, the fund had excluded some of the countries featured in MSCI's standard emerging-markets index because of trading complications or other factors. Over the years, Vanguard had allowed in country after country as their conditions improved, but a few--including Russia, which had become more and more prominent in actively managed portfolios--were still left out. Then in August, Vanguard tossed out its custom index and simply adopted the MSCI Emerging Markets Index as its benchmark. Immediately Russia became the third-largest stake, with more than 10% of assets.

Russia thus joins the many other countries that once languished far off of the radar screen for nearly all fund managers, but which now show up in portfolio after portfolio. So, with such holdings becoming commonplace, what's a manager looking for an edge to do? For some, the answer has been to turn toward even less-familiar destinations. These areas, often called "frontier" or "pre-emerging" markets, are becoming more noticeable among emerging-markets funds and among some broader funds as well.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.