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3 Emerging-Markets Equity Funds That Have Handled Volatility Well

These stalwarts won't avoid all of their asset class' rough spots, but they can smooth them out.

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Fears over trade wars, slowing growth in China, and rising U.S. interest rates have wreaked havoc on emerging-markets stocks. The diversified emerging-markets Morningstar Category was the worst nonsector or single-country fund peer group for the year to date and trailing 12 months through mid-October 2018.

This type of volatility still comes with the asset class. Emerging markets are different than they were when investors started using the term more than three decades ago. They are deeper, more liquid, and populated by more-mature global companies. The developing world, however, is still prone to social, political, and macroeconomic upheavals that can churn short-term equity returns. It still pays to have a steady hand at the helm of a proven process if you opt for an actively managed investment strategy.

Morningstar Analyst Ratings have long recognized this. Here's a look at how some of the funds that Morningstar has rated the longest in the group have negotiated recent and long-term volatility.

 American Funds New World (NEWFX), which has had an Analyst Rating of Gold since November 2011, tries to win by not losing. The managers, who run independent sleeves of this offering, together create a portfolio that has mixed cash, emerging-markets stocks and bonds, and developed-markets stocks that get at least 20% of their sales from developing economies. Consequently, the lows have not been as low as most of the fund's peers, and it has had shallower holes to climb out of when the asset class has cratered. It limited losses, for example, in a 2015-16 sell-off and so far this year. Though the fund will lag in periods of emerging-markets exuberance, it makes up ground over time. Its 5.9% annualized gain from November 2011 through September 2018 beat the category's 2.8% average and the MSCI Emerging Markets Index's 3.2%.

 T. Rowe Price Emerging Markets Stock's (PRMSX) seasoned management has been a bit more aggressive than American Funds New World, but successful. Lead manager Gonzalo Pangaro has done a solid job applying T. Rowe Price's valuation-conscious brand of growth investing to the developing world. During his tenure, the fund has weathered numerous market cycles with a mix of edgier and more-staid fare in a broadly diversified portfolio. More-consistent direct exposure to emerging-markets-domiciled stocks has made this fund more volatile, as measured by standard deviation of returns, than the category and MSCI Emerging Markets benchmark over the years. The fund started with a Bronze rating in November 2011 and was upgraded to Silver last year after Pangaro's deft, patient stock-picking compensated investors over time. It fell harder than most peers and its benchmark in 2018 through September, losing 10.1%; but its 4.6% annualized gain from November 2011 through the end of 2018's third quarter beat the typical rival and index.

Silver-rated  Oppenheimer Developing Markets (ODMAX) invests more thematically than American Funds New World and T. Rowe Price Emerging Markets; its management team organizes its research around broad trends, such as rising global affluence. Lead manager Justin Leverenz has delivered a portfolio with a favorable risk/reward profile by focusing on individual companies positioned to best benefit from secular shifts. Those aren't always based in emerging markets, as the fund's above-average (but still lower then American Funds New World's) developed-economy stake implies. The fund's 4.7% loss for the year through September was shallower than that of most peers and its benchmark, thanks to holdings like French luxury firm Kering (KER). The fund's 5.9% annualized gain from when it received its first rating in January 2012 through Sept. 30, 2018, beat the category average's 3.9% and the index's 4.6%.

Dan Culloton has a position in the following securities mentioned above: NEWFX. Find out about Morningstar’s editorial policies.