Time to Buy Emerging Markets
Some ideas for betting on another rebound.
Worries about trade wars and decelerating global growth in 2018 left their imprint on developing economies and the funds that invest in them. Between Jan. 29 and Oct. 29, the MSCI Emerging Markets Index lost a fourth of its value, peak to trough. Popular Chinese stocks like Tencent and Alibaba (BABA) helped lead the race to the bottom. While the months of November and December brought somewhat of a reprieve, the typical diversified emerging-markets Morningstar Category fund shed 16.1% in 2018. Investors who had the temerity to increase their exposure to emerging markets during the last bear market ended on Jan. 21, 2016, reaped a handsome reward as the MSCI Emerging Markets Index almost doubled prior to its 2018 downturn. Here are a few ideas for betting on another rebound.
American Funds New World (NEWFX) is the only diversified emerging-markets fund with a Morningstar Analyst Rating of Gold. It uses American’s signature multimanager system, dividing the fund’s asset base into separately run sleeves. In this case, eight equity managers, one balanced manager (tasked to buy stocks and bonds), and one fixed-income manager tap emerging markets’ growth through a revenue-centric approach. Firms with at least a fifth of their revenues or assets attributable to the developing world are fair game for the fund--provided at least 35% of the strategy's assets are invested directly in emerging-markets securities. The fund’s December 2018 asset mix was typical. It had a 5.1% bond stake, 9.8% in cash, and the rest in an equity portfolio split roughly evenly between emerging-markets-domiciled companies and developed-markets multinationals like top-five holding Alphabet (GOOG). Alphabet profits from the growth of Internet usage in developing countries like India, which means it meets the fund’s revenue requirements.
Gold-rated American Funds New Economy (ANEFX) falls in the large-growth category but deserves special mention. Its focus on companies driving or benefiting from innovation and its latitude to invest up to 45% of assets in non-U.S. firms typically lead to a heavy weighting in emerging-markets stocks relative to domestic peers. Nearly half of the December 2018 portfolio’s 15% emerging-markets stake was in Chinese stocks, including a top-10 position in Tencent. That weighed on the fund’s 2018 results versus rivals, but it remains a compelling option over a full market cycle.
Silver-rated Seafarer Overseas Growth and Income's (SFGIX) profile resembles that of a higher-conviction pure play on emerging markets. Comanagers Andrew Foster, Paul Espinosa, and In-Bok Song look across the market-cap spectrum of emerging as well as frontier markets for companies with reliable income streams and opportunities to build their businesses. Dividend-payers of varying yields and growth prospects populate the fund’s roughly 40- to 60-stock portfolio. Granted, the availability of this fund’s retail shares is limited, but the institutional shares reopened on Nov. 19, 2018, and have an accessible $25,000 minimum investment level. The institutional shares can also be had by those who establish an automatic investment plan directly with Seafarer for a $1,500 minimum initial outlay and a commitment to investing $100 or more per month or quarter.
Bronze-rated Artisan Developing World (ARTYX) lost two veteran team members in June 2018, but talented manager Lewis Kaufman remains at the helm. He joined Artisan Partners in 2015 after roughly a decade at Thornburg Investment Management, where he earned superior results running an emerging-markets mandate between late 2009 and February 2015. Kaufman has had success with the same strategy at Artisan. His roughly 45- to 50-stock portfolio is focused on free cash flow generative companies with modest debt and includes a mix of developed-markets firms with major economic ties to the developing world, such as Starbucks (SBUX), emerging-markets-domiciled companies, and frontier-markets picks.
Alec Lucas has a position in the following securities mentioned above: BABA. Find out about Morningstar’s editorial policies.