Emerging-markets investments (which invest in China, India, Russia, Turkey, and Brazil and other developing countries) have the potential for eye-popping gains, but volatility is also a challenge: The typical emerging-markets fund has a standard deviation (a measure of volatility) that’s 5 percentage points higher than that of the average foreign large-blend fund. The returns that investors have actually pocketed when you factor in the timing of their purchases and sales are notably worse in these funds versus diversified foreign-stock funds. For that reason, the best entry point into emerging markets for many investors is via a diversified foreign-stock fund that has the latitude to venture into both developed and developing markets. But for those investors who need a dedicated emerging-markets fund, the next best thing could be to look for those funds that have limited volatility in this admittedly rocky category. For this list of ideas, we started by screening for diversified emerging-markets funds that have an Analyst Rating of Bronze, Silver or Gold, and below-average Morningstar Risk scores. Make no mistake—any emerging-markets fund can suffer tremendous losses, but among this more volatile category, these funds have proven to protect assets better in bad markets. The result is a solid list of fund that are a great start place for any investor looking specifically to add to their emerging-markets exposure.
Morningstar Analyst Rating
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Diversified Emerging-Markets Funds
These portfolios invest at least 70% of total assets in equities and invest at least 50% of stock assets in emerging markets (such as China, India, Russia, Turkey, and Brazil). Morningstar classifies countries as developed or emerging based on per capita gross national income, as defined by the World Bank. The World Bank classifies countries as low income, middle income, upper middle income, and high income. With very few exceptions, the countries with high income are considered developed markets.
The Analyst Rating for Funds is based on our fund analysts’ conviction in a fund’s ability to outperform its peer group (funds in the same category) and benchmark on a risk-adjusted basis over the long term. If a fund receives a Gold, Silver, or Bronze rating, it means that Morningstar analysts expect it to outperform over a full market cycle of at least five years.
Morningstar Risk Rating: Below Average or Low
The Morningstar Risk Rating sizes up the variations in a fund’s monthly returns, with an emphasis on downside variations, in comparison to similar funds. In each Morningstar Category, the 10% of funds with the lowest measured risk are described as Low Risk, the next 22.5% Below Average, the middle 35% Average, the next 22.5% Above Average, and the top 10% High. Morningstar Risk is measured for up to three time periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall measure for the fund.
Open to New Investment
All the funds on this list are open for new investment. Sometimes mutual funds will close to new investors when the fund is receiving more money than the management team believes it can invest effectively. Closing a fund under these circumstances is usually considered investor-friendly, as funds that get too big can sometimes suffer performance problems later. Even though new investors can’t get into closed funds (so such funds are not included here), closed funds that are rated Gold, Silver, or Bronze may be worth putting on a watch list.
This list includes only no-load funds. “No load” refers to a mutual fund that does not charge a fee (known as a load) for buying or selling its shares; the investor typically buys no-load funds directly from a fund company or through a fund supermarket. Load funds, on the other hand, are sold by an advisor or broker and charge a percentage fee at purchase or sale of the shares, which is meant to be compensation for the planner’s investment-selection advice. (Note: Not all advisors sell load funds. Many are compensated via a flat fee or a percentage of all assets under management.) Whether a fund charges a load or not isn’t a reflection of its underlying quality. Many load funds are also Medalists, and some load funds are available without a load through 401(k) or other retirement plans. But we’re including only no-load funds here, since this list is designed to help investors who are primarily doing their own fund-picking.
Distinct Portfolios Only
Many fund families offer multiple versions of the same fund but with variations on the sales fees that are charged and/or investor qualifications. Screening for “distinct portfolios only” removes all but one of these options to avoid having several share classes of the same offering cluttering the list. Morningstar normally designates the oldest share class as the distinct portfolio. In some cases, this share class may be for institutions (such as company retirement funds) or otherwise have a high investment minimum. In those cases, investors may want to consider an “investor” share class of the same fund, though the fund expenses may be higher for those share classes.