Published September 28, 2012
Emerging markets funds were once at the far periphery of portfolio allocation strategies. It’s hard to imagine now, but 30 years ago, China was barely a blip on the world’s radar screen, Russia was still locked into the dead-end economics of the Soviet Union and Latin America was better known for unstable military juntas than for world-class private enterprises. How times have changed.
Emerging markets have—for all intents and purposes—emerged to be the growth engine powering the world economy. Emerging markets funds have moved to a core asset class—perhaps still with a lower allocation weighting than U.S. equities, but with closer parity to developed non-U.S. equities.
As with any equities asset class, emerging markets funds tend to be best for investors with long-time horizons. There can be some intense bumps along the road, and investors should always consider the potential returns offered by an asset class like emerging markets in the context of their own risk tolerance levels.
It can be difficult to navigate this sector to identify which funds are best for your financial situations. In the case study which follows, we illustrate the fund selection process for an example investor, showcasing the measures every investor should take into account when selecting funds and describing the three emerging markets funds that are a good fit for this investor and three which the investor would be better off avoiding.
Case Study: Andy Bennett
Andy Bennett is 39 and single. He has an active career as a sales representative for a large industrial technology company, is always on the go, and leads a “lean” life—rented apartment in the city, old car paid off long ago and many days and nights on expense account while covering his sales territory.
Andy knows that he needs to start getting serious about building wealth for the long term, and within a matter of years, he imagines he will finally decide to settle down, start a family, buy a home and all that. With a decently long time horizon ahead of him and a fairly aggressive attitude towards risk, Andy feels he can take a strong growth orientation in his portfolio allocation. As a salesman, he knows first hand how strong the competitive threat is from companies that hail from places like China, Brazil and Malaysia, and he believes that he needs a solid emerging markets equities exposure at the core of his portfolio.
Andy is interested in long-term capital appreciation and has very low near-term income needs. He doesn’t want to pay more in fees than he has to, and prefers funds where the fund manager can demonstrate a long-term tenure of success in executing the fund strategy.
According to our research and rankings, the following three funds are his top choices:
These are from a pool of 152 funds with a track record of at least five years.
When compared to the S&P 500 (using the Vanguard index fund VFINX as a proxy) the top emerging markets funds all show strong outperformance over a long time horizon (10 years being the long-term benchmark here). It’s true that the U.S. index has done relatively better in a shorter time period, mostly due to unusually volatile market conditions that have tended to favour high-dividend blue-chip stocks. But Andy is mostly interested in the long term, and he believes that relative outperformance will continue going forward.
Andy has to consider these three funds in light of his aversion to high fees. The Vanguard VEMAX fund clearly has performed somewhat less well than its two peers on a total return basis, but it has an impeccably low expense ratio.
At the same time, the Oppenheimer ODVBX fund has been a strong total return performer, but has the baggage of a very high fee structure, which can make it less appealing. Andy might be inclined to base his choice around whether he can live with the somewhat higher—but reasonable for an actively- managed fund—fees of the Lazard LZOEX fund in exchange for the performance boost, or whether to fall back on the more attractive fees structure of the Vanguard index fund.
What about poor performers? Here are the laggards in the emerging markets space, for reasons that include poor total return performance along with slightly higher risk metrics and unnecessarily higher expenses.
When choosing funds for long-term investment goals, it is always a good idea to pay close attention to performance in the areas that matter most to you—whether that be long or short term total returns, risk, management team tenure or fees. Keep in mind that generic rankings are not going to give you insights into how fund performance relates to your own unique investment needs. And watch out for brokers trying to sell you whatever funds their firm happens to be pushing that week—they may include those funds at the bottom of the pile that you want to stay away from.
For a free, easy way and objective way to find the best investments for you, visit Jemstep.com.
Jemstep Inc. is a free online investment guidance and management service that helps individual investors make better investment decisions and achieve their financial goals faster. Jemstep’s investment evaluations, based on patented technology and objective market data, are unbiased and transparent. Jemstep does not accept paid listings or sponsorships that influence its fund rankings in any way, nor does it factor subjective user reviews into the guidance it provides. A privately owned company with headquarters in the heart of Silicon Valley, Jemstep is a registered investment advisor under the rules and regulations of the U.S. Securities and Exchange Commission. To learn more, please visit www.jemstep.com.