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By Jason Stipp and Michael Rawson, CFA | 12-06-2013 03:00 PM

Individual Investors Stick With Emerging Markets

While institutional investors have been selling out of their emerging-markets ETFs amid this year's disappointing performance, it appears that mom-and-pop investors are holding on to their open-end EM mutual funds.

Jason Stipp: I'm Jason Stipp for Morningstar. We know emerging markets have had a tough time in 2013, but we also like to look at what investors are doing. 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.

Here to help us track that is Morningstar fund analyst Mike Rawson.

Mike, thanks for joining me.

Mike Rawson: Thanks for having me.

Stipp: You track fund flows into all different kinds of funds. We're going to talk about emerging-markets funds today. We know performance has been relatively weak compared to the developed markets, but what about the trend in fund flows--people putting money to work in emerging-markets funds or taking money out? What does that look like in 2013?

Rawson: The trend is still positive, which I think is a good thing. Maybe some people are rebalancing in and taking advantage of the sell-off in emerging markets. As you mentioned, emerging-market performance has been quite weak, but the flows are positive, but they're much weaker than what they had been historically. Historically, flows into emerging markets have been very strong, and I think that's really due to two factors.

One is the home-country bias, where people tend to be overinvested in their home country. People are starting to learn about that and kind of overcome that, and now asset allocations, investors' portfolios into emerging markets, are about caught up with where they should be on a market-value-weighted basis. That was helping boost flows.

An additional factor is performance-chasing. Emerging markets have done really well over the past 10-15 years. So, investors are probably seeing that in the rearview mirror and investing in emerging markets.

Now, this year, the story has been different. As you mentioned, emerging-market performance has been very weak. Developed-market performance is very strong. We're definitely seeing stronger flows into developed markets, and on an organic growth rate, which would be flows relative to assets, developed-market flows are actually stronger than emerging markets.

So, [emerging-markets fund flows] are still positive, but weaker than what they had been in the past.

Stipp: Do you think it's generally a good sign, though, that investors aren't leaving emerging markets en masse just because we're having a relatively disappointing year?

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