3 Reasons to Be Cautious of Emerging Markets Funds
Emerging Market Funds are once again a hot topic as the recent rally in the US market has also been seen internationally. From March 10th to the present Emerging Market Funds have seen returns as high as 70% or more. Is this enough for investors to simply hop onboard and buy into the most recent bull run?
Morningstar feels investors should be very cautious about such optimism. While these funds run up with impressive numbers and speed they also can fall just as quickly. Offered are three reasons to be cautious of Emerging Market Funds (shortened for length):
Enough Emerging-Markets Exposure Already?
The first thing that investors should do is determine how much emerging-markets exposure is in their other equity offerings. For starters, most foreign large-cap funds have between 8% and 13% of their assets invested in the developing world; the majority of foreign small/mid offerings have similar percentages devoted to emerging markets; and many prominent foreign-stock funds currently have much bigger stakes in the developing world.
Big Risks As Well As Big Rewards
Investors who want more emerging-markets exposure should make sure that they fully understand the explosive nature of funds that focus on the developing world. This spring isn’t the first time that these funds have skyrocketed in favorable climates. Indeed, they soared to huge absolute gains and handily outpaced all other types of funds in the early 2003 to late 2007 global rally, as a robust worldwide economy fueled strong demand for emerging-markets materials and products and as local conditions were constructive in most of the developing world.
This is also just as true though on the downside. With unfavorable market conditions funds can turn south and fall as fast if not faster than the rate they ran up, and in shorter periods of time.
Choose Wisely
The first impulse of many emerging-markets fans is to focus on funds dedicated to the developing world’s trendiest exchanges or offerings that leave their competition in their dust during rallies. But as we pointed out last year and at other times in the past, single-country emerging-markets funds and other extremely bold emerging-markets offerings are problematic.
The article goes on to highlight Russia as a prime example as the Russia ETFs lost nearly 80% of their value during the most recent financial crisis. Instead of investing in a single country fund Morningstar recommends investing in a basket of countries through a more diversified fund. Examples include the American Funds New World (NEWFX) and the Dreyfus Emerging Markets (DRFMX).
(To research these funds we recommend utilizing Morningstar which provides fund rankings, holdings breakdowns, sector analysis, fee information, and more.)
Source:
Look Before You Leap into Emerging-Markets Funds
William Samuel Rocco, Morningstar
Yahoo Finance, Tuesday June 9, 2009, 7:00 am EDT
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