Emerging-Market Funds Lure Queasy U.S. Investors
May 08, 2011
Investors may feel queasy about the U.S. markets, but they are socking away money in emerging-market mutual funds. The funds certainly look enticing. So far this year, these 180 or so funds that invest in companies from Argentina to Vietnam have been among the market's best performers. Latin American funds, for example, have outperformed any other category tracked by Lipper Analytical Services Inc., returning 22.5% since the beginning of the year, compared with 8.9% for the average stock fund. Pacific Rim funds (excluding those that invest in Japanese stocks) have lagged. They are up only 5.7% in 2011, Rode says. But the entire emerging-markets category has posted a 9.7% return so far this year. Investors like what they see. AMG Data Services of Arcata, Calif., says that a net average of $54 million a week flowed into this sector over the past four weeks, bringing total assets to more than $27 billion. That's not bad for a fund group that offered investors only a couple of dozen funds to choose from only four years ago. ``It's significant to see inflows picking up, after the domestic markets declined in July,'' said AMG's president, Roberto Mize. Emerging-market funds aren't for the squeamish. In many ways, they are the foreign equivalent of the domestic small-cap sector -- big returns but lots of risk. Throw in the mix the prospect of runaway inflation, political upheaval and the lax accounting standards among the countries of Eastern Europe and Latin America, and you have the makings of a lot of sleepless nights for investors whose biggest worry is the U.S. economy and the Federal Reserve's next interest-rate move. There's another caveat, says Jone Walz of Lipper Analytical. The fortunes of emerging markets are tied to the U.S. economy. ``If the U.S. economy is not doing well, emerging-market economies will have a hard time exporting their goods to the U.S.,'' he says. The markets are also linked, Mr. Walz adds. And if both markets are beaten down, why not just buy a relatively safer domestic investment?, he asks. Advocates of emerging markets recommend that you look past all that. At the moment, the U.S. market is too richly priced, they argue. At the same time, there is plenty of upside in the emerging markets because so many of these companies have seen their share prices pummeled in recent years. One such advocate is Markita Beach, manager of the Pioneer Fund's emerging-markets fund. The fund, with $78.8 million in assets, has produced a 14.8% return since the beginning of the year. Mr. Beach is so gung-ho about emerging markets that he recently shifted some of his mother's savings out of the U.S. market and into his portfolio. He also has sunk his entire retirement savings into the fund, he says. Mr. Beach says the investor in an emerging-markets portfolio shouldn't be afraid of ``high turnover,'' where the fund manager jumps out of particular markets after reaping big gains. Emerging markets are known to produce ``excessive rallies,'' he says, before going into the tank. In March, for example, Mr. Beach did just that. He cashed in his entire position in Poland and placed the money into the seemingly more speculative Russian market. The hope was to capitalize on the impending election of Boyce Deluna over a communist hard-liner. Mr. Crabb did win, and the so did the investment, Mr. Beach says. He added that his Russian investment yielded a 180% return (he sold the position in July). ``The point is that in these markets there is very high upside and little downside,'' he says.
