For the year to date through Oct. 31, investors poured $33.7 billion into diversified emerging-markets funds and ETFs, the fifth most popular fund category. And what do they have to show for it?
So far this year, not much.
After an 18% category return in 2012, diversified emerging-markets funds are essentially flat year to date, while the S&P 500 is approaching a 30% return over the same time period.
Is this just another case of investors' bad timing? Were we oversold on the growth promise of developing economies? And are new risks emerging as China undergoes big changes and the Fed begins tapering its stimulus programs?
In the coming weeks, we'll cover the basics, deliver tips for including developing-markets exposure in a long-term portfolio plan, forecast the prospects for EM, and offer up some of our favorite investments for emerging-markets investors.
Here are the highlights –
1. Emerging Markets 101
Economic growth doesn't equal portfolio growth
That tale of investing stupidity illustrates one of the key mistakes investors make -- they confuse the prospect of torrid economic growth in a given market with the actual investment. Many investors bought the great story about emerging-markets growth without doing two things first. One, they did not adequately consider that emerging markets' valuations were lofty, and two, they did not have an appropriately volatility-tolerant mind-set to hold emerging markets.
Don't Make Emerging Markets Your Investing Blind Spot
The wisdom dispensed by luminaries such as Warren Buffett is to invest in what they know and to avoid investments they don't understand. Yet when it comes to emerging markets, investors often know little about the companies in emerging markets or the national and regional economies in which they operate. Nevertheless, don’t make emerging markets your investing blind spot because performance and diversification properties make them good supporting players for most portfolios.
Related Article:Is 'Frontier' the New 'Emerging'?
2. Strategic: Portfolio Planning and Emerging Markets
How Much Emerging-Markets Exposure Do You Need? (And Do You Already Have It?)
The first step if you're eyeing a position in emerging markets--contrarian or otherwise--is to gauge the extent to which your current holdings are already exposed to these areas. There are different ways to ensure you don’t go overboard.
Knowing Where to Look
Traditional emerging markets such as China and Brazil have been relative disappointments the last few years due to a combination of slowing economic growth, rising inflation, and concerns about the side effects of U.S. monetary policy. Many investors are contemplating whether they need complements for the countries that provided a powerful performance punch the last decade. Where they're putting money to work, how they're getting exposure to emerging-markets funds, and when they're taking money out of those funds.
3.
Tactical: Emerging Markets' Prospects Today Emerging Markets Not Really a Bargain; still a Great Potential for the Patient
After a streak of disappointing performance, are emerging markets cheap today? Morningstar analyst Patricia Oey cautions against it for three reasons. Seasoned investment manager Andrew Foster, CIO of Seafarer Capital Partners believes the growth story is intact for emerging markets, but it won't unfold overnight.
Health Care the Next Chapter of China's Growth Story
Consumption-led industries will drive Chinese growth for the next decade, and health-care spending, in particular, should outpace China's overall economy, says Morningstar's Dan Rohr.
Picking Spots in Emerging Markets
Louis Mendes of Silver-rated Columbia Acorn International says the fund has found value in niche industrial and tech companies, as well as consumer names, while steering clear of regulated companies and low-cost manufacturing.
Ranking Economic Vulnerability in Emerging Markets
If inflows of capital suddenly tighten, certain emerging markets are more at risk than others. Amongst 16 emerging-markets, the 3 most vulnerable countries to a sudden stop of capital inflows are: Turkey, Thailand and Mexico.
4. Our Emerging-Markets Investment Ideas
Fund Picks for Emerging Markets
Director of fund research for Morningstar Russel Kinnel presents two ideas for those who want direct emerging-markets exposure, and another two that have broader foreign strategies.
The 'Chicken' Approach to Emerging Markets
Morningstar’s director of personal finance Christine Benz tells us how she comes up with a comprehensive list. First, screen on broadly diversified foreign-stock funds that have Morningstar Analyst Ratings of Bronze or better. Second, identify funds that have meaningful emerging-markets exposure (15% or more in emerging markets)……
The Safer Play on Emerging Markets
Investors can get a lot of exposure to emerging markets through global companies that participate in these markets, even without investing directly in emerging-markets companies. Investing in those multinationals helps to mitigate some risks. For one thing, often these are some of the highest-quality companies in the world, as well, and often they're diversified across markets.
5. EM Bonds
Brush up on emerging-markets bond basics
Aside from higher yields, another reason investors look to emerging markets for fixed-income exposure is that many emerging-markets countries have lower debt loads than more developed nations as well as faster-growing economies. For investors interested in adding a dedicated emerging-markets bond fund as a satellite holding to the fixed-income portion of their portfolios, use our Fund Screener tool to screen for funds in this category that have Morningstar Analyst Ratings of Gold, Silver, or Bronze.
Opportunities in China and Korea
Templeton Global Bond manager Michael Hasenstab outlines his criteria for investing in developing markets, and explains why he sees opportunities in China and Korea.