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Emerging-Markets Funds Weather the Storm

Four emerging-markets Morningstar Medalists have shown their upside on the downside.

This article was originally published in the August 2018 issue of Morningstar FundInvestor. Slight adjustments were made to reflect recent market changes. Download a complimentary copy of FundInvestor by visiting the website.

Emerging-markets stocks have had a rough time of it lately. The diversified emerging-markets Morningstar Category has been one of the worst-performing categories so far in 2018, with China region and Latin America stock (subsets of emerging markets) among the only categories to perform worse through mid-August. Yet these were among the best-performing categories in 2017, illustrating how volatile this section of the market can be.

Despite this volatility, emerging-markets stock funds can be great portfolio diversifiers when used appropriately. Here are four Morningstar Medalists in the diversified emerging-markets category, all of which have Morningstar Analyst Ratings of Gold or Silver. Each of these funds held up well relative to peers in the first half of 2018, and all have strong long-term records.

 American Funds New World (NEWFX)
This is the only Gold-rated fund in the diversified emerging-markets category. Like the other American Funds, it's run by a team of managers, each of whom separately runs a slice of the portfolio, but all of whom follow a broadly similar strategy for finding good emerging-markets stocks. At least 35% of the portfolio must be invested directly in emerging-markets securities, but the managers also hold many U.S. or Euro­pean stocks that get a lot of their revenue or profits from emerging markets. That has tended to make it less volatile than most other emerging-markets funds and able to hold up better in risk-averse bear markets.

This conservative approach is a major reason why the fund ranked in the top 10% of the category in the first seven months of 2018. It also has an outstanding long-term record, including a 5.8% annualized return since it got its Gold rating in November 2011 through Aug. 16, 2018, beating the category's 2.6% return over that time frame. Low expenses, typical for the American Funds, add to its appeal.

 Oppenheimer Developing Markets (ODMAX)
This fund has been managed by Justin Leverenz since 2007, using a thoughtful, bottom-up strategy. He looks for emerging-markets stocks with competitive advantages and above-average earnings growth potential, especially those that fit into any of several investment themes, such as mobile payments or the growth of consumer finance. Valuation is also a key element of the process. This balanced approach has helped the fund hold up well in down markets while also participating when emerging-markets stocks rally. Since getting its Silver rating in January 2012, the fund gained an annualized 5.8% through mid-August 2018, well above the 3.8% category average during that time. It was one of the category's top performers in the first half of 2018 thanks to solid gains by such holdings as  Alibaba (BABA), Novatek (NVTK), and Kering (KER).

 T. Rowe Price Emerging Markets Stock (PRMSX)
Morningstar upgraded this fund's Analyst Rating to Silver from Bronze in November 2017. The manager is Gonzalo Pangaro, who has been investing in emerging markets for 25 years and has been a manager on this fund for the past decade, supported by a large and experienced analyst team. Much like the Oppenheimer fund, this fund combines a growth orientation with an emphasis on valuation, thus helping it do well in a variety of market conditions. Returns have ranked in the top one third of the category each year from 2014 through 2017 and in the months since its upgrade to Silver.

 Harding Loevner Institutional Emerging Markets (HLMEX)
Five managers run this Silver-rated fund, supported by a deep team of 29 analysts. Their strategy, like those of the other funds on this list, combines a growth orientation with an emphasis on quality features that serve as a form of risk control. That has helped it post a well-above-average 4.5% annualized gain since October 2012 through Aug. 16, 2018. It held up well in the first half of 2018, thanks mainly to Chinese names such as ENN Energy Holdings and Shenzhou International Group Holdings.

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