5 Top Emerging-Markets Funds That Look Beyond Emerging Markets
These managers have expanded the boundaries, and succeeded.
In a recent column, we noted how new types of emerging-markets equity funds have become more common. The topic was discussed in much greater detail in a recently released research paper, “The Growing Complexity of the Emerging-Markets Landscape.” That paper points out that the traditional variety of emerging-markets equity funds, which focus primarily on large companies based in the bigger emerging markets, is preferable for most investors. The more-recently minted types--geographically flexible funds, small/mid-cap offerings, multiasset portfolios, and frontier-markets funds--generally lack long and successful track records, are too expensive, or have other traits that reduce their appeal.
However, there are a few exceptions. In particular, the geographically flexible group boasts several worthwhile offerings; five have Morningstar Analyst Ratings of Bronze or higher. Geographically flexible funds invest not just in emerging markets, but also in companies based in developed markets, as long as the firms have extensive business in emerging markets and meet the managers’ other criteria. Roughly two dozen emerging-markets equity funds regularly have weightings of 15% or higher in developed markets (such as the United States, Japan, and the United Kingdom); a few stand close to the 50% mark.
This approach is not inherently superior to investing purely in companies based in emerging markets. But it does expand the roster of companies available, and can reduce the added volatility often associated with emerging-markets investing.
That said, investors evaluating a geographically flexible emerging-markets fund should consider the same factors as they would when evaluating a traditional emerging-markets fund, or in fact any other fund: managerial experience and track record, the investment strategy, and costs, among other things.
These funds can be very different from one another--not just in the size of their developed-markets stakes, but in investment style as well. And while some, such as American Funds New World (NEWFX), were created with a developed/emerging mix as a key part of their mandate, others such as Virtus Emerging Markets Opportunities (HEMZX) end up with substantial developed-markets weightings simply because their managers see the opportunity there and think it makes sense to capitalize on it.
Aberdeen Emerging Markets (ABEMX)
This fund, which opened in 2007 and is closed to new investors, is in the hands of a sizable and seasoned management team. The team employs a quality-driven strategy that’s sound as well as proven. The team does not go out to invest in companies that are headquartered in the developed world. But it will purchase such firms when they meet their quality standards and have considerable business in emerging markets. It currently owns the U.S.-based restaurant conglomerate Yum Brands (YUM), the global brewing giant SABMiller (SAB), and two other firms headquartered in Great Britain. The team has executed this approach well and delivered good results in most sell-offs, as well as relatively strong long-term risk-adjusted returns here (and over the longer run at other offerings). This fund also has a relatively attractive expense ratio and it merits a Silver rating.
American Funds Developing World Growth and Income (DWGAX)
This fund is just a few years old, but it has several factors in its favor and a Bronze rating. All three of its managers have decades of relevant experience. The managers favor steady dividend-payers that are selling at attractive prices, rather than chasing after the highest yielders, so their approach is prudent as well as distinctive. Companies that are based in the developed world are fair game as long as they receive at least half of their revenue from or hold at least half of their assets in emerging economies; this fund currently has approximately 25% of its assets in such firms. This fund has posted mixed results thus far, but its managers and process inspire confidence, as do its low costs and the strong track records of its international-stock siblings.
American Funds New World (NEWFX)
This Gold-rated multimanager fund, which launched in 1999, was the first retail offering to make a point of combining emerging-markets stocks with a large percentage of stocks from companies based in developed markets, such as current top-20 holdings Nestle and Novartis, that derive a sizable chunk of their revenue from emerging markets. The fund also devotes a small slice of the portfolio to emerging-markets bonds. The formula has worked as intended, holding down losses during emerging-markets declines while still posting solid gains in rallies. It’s in the top decile of the diversified emerging-markets Morningstar Category over the trailing 10-year period through Jan. 31, 2016. In addition, its Morningstar Risk Rating is Low for the three-, five- , and 10-year periods, meaning it has had endured significantly less volatility than the average diversified emerging markets offering.
Oppenheimer Developing Markets (ODMAX)
This fund earns a Silver rating. Justin Leverenz, who took the helm in 2007 and has more than $1 million invested alongside fundholders, is quite experienced and talented. He focuses on companies with competitive advantages and healthy free cash flows that can generate high returns on capital throughout a market cycle. While he does not set out to buy firms based in the U.S. or other developed markets, he will purchase such names when they have ample business in the developing world and meet his quality and other criteria. This fund owns the U.S-based gaming company Las Vegas Sands (LVS) and the Western Europe-based luxury-goods firms Prada (PRDSF) and LVMH Moet Hennessy Louis Vuitton (LVMHF), plus a trio of companies headquartered in Great Britain. Leverenz has delivered the goods with this approach, posting milder-than-average losses in most down markets and earning superior risk-adjusted returns over time. Below-average costs round out this fund’s appeal.
Virtus Emerging Markets Opportunities (HEMZX)
Rajiv Jain from Vontobel Asset Management has run this fund since 2006, and has given it a distinctive profile as well as a record of success. It has a Silver rating. Jain is a growth-oriented manager, but he looks for steady, dependable growth from companies that have demonstrated the ability to weather tough times rather than higher rates of growth that may be less reliable. That, as much as its developed-markets exposure (currently about 20% of assets), has helped the fund hold its losses far below those of most rivals when emerging markets have plunged. Two notes of caution: The fund typically has a large overweight position in India (focused on just a few companies), which can hurt when sentiment toward that market weakens, and Jain likes the steady growth rates of tobacco companies. So this fund isn’t appropriate for investors uncomfortable with that level of tobacco exposure.
William Rocco owns positions in both American Funds New World and Oppenheimer Developing Markets in his 401(k).
Gregg Wolper has a position in the following securities mentioned above: NEWFX, ODMAX. Find out about Morningstar’s editorial policies.