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Fund Spy

Beware the Emerging-Markets Bandwagon

Most of the new emerging-markets funds can safely be ignored.

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The number of emerging funds has been expanding rapidly. More than four dozen diversified emerging-markets funds have been launched in the past three years, in fact, raising the total number of such offerings to 150. In addition, many region-specific funds--China Region, Latin America, and Pacific Asia ex-Japan--have opened over this time span. There now nearly 80 regional emerging-markets offerings.

There are some good reasons for this. The growth rates and overall economic fundamentals have been better in the developing world than the developed world for several years, and those advantages are expected to persist. And the investment and regulatory climates have improved considerably in many developing countries in the 2000s, while the universe of public companies has increased significantly in number and quality.

But there also are ample grounds to believe that many fund companies are engaging in performance chasing: The four categories of emerging-markets funds earned huge gains and crushed all other types of mutual funds in the early 2003 to late 2007 worldwide stock surge, and they've performed similarly well in absolute terms and nearly as well in relative terms since the current equity rally began in March 2009.

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