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.
Alec Lucas, Ph.D. does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.