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By Russel Kinnel | 12-09-2013 04:00 PM

Kinnel's Fund Picks for Emerging Markets

FundInvestor editor Russ Kinnel presents two ideas for those who want direct emerging-markets exposure, and another two that have broader foreign strategies.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. It's emerging-markets week on Morningstar.com, and joining me to share his best ideas for investing in emerging markets is Russ Kinnel. He is director of fund research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, there are various avenues that people can take for investing in emerging markets. Let's discuss why someone might want to invest directly in some sort of emerging-markets fund or exchange-traded fund? What are the pros and cons of doing that?

Kinnel: Well, obviously, the case for emerging markets is fairly strong, and it's a tremendous growth engine for the whole world. But if you want to buy a fund dedicated to emerging markets, what's good about it is you know then that part of your portfolio is going to give you emerging-markets exposure. And you don't have to worry about a manager in a more broad fund moving somewhere else and giving up on that.

Benz: You have a little bit of control.

Kinnel: That's right. It gives you a little more control. The downside is that it's more volatile. Emerging markets even though they seem to be a growth engine and you would think many of them have less debt issues than the U.S. and Europe, nonetheless they're very volatile still. When we do this risk-off, risk-on move, emerging markets are always part of that.

You have to be prepared for more volatility; you have to be prepared for the cycles. It can be pretty rough in that you might have three years of losses and then three years of huge gains. You really have to think long term, and you have to be risk-tolerant or you are not going to get the benefits.

Benz:  I know when we look at some of our investor-return data we see that sometimes investors don't time their purchases of emerging markets so well, though they've been buying recently even though performance hasn't been that great.

Kinnel: That's right. You see that reflected in investor returns. People sometimes will give up at the wrong times, and so, I think, in general, even if you're getting a dedicated emerging-markets fund, you might want to look for one that's a little less risky to at least smooth it out some of those extremes.

Benz: You brought couple of ideas for people who want to invest directly in emerging markets. These are funds that you like a lot. The first one is a fund that is not a household name. It's Harding Loevner Emerging Markets. Let's talk about that fund and why you think it's a good pick?

Kinnel: Right. Well, as you say, it's not a household name. That's one good thing in that it doesn't have that much money to manage as opposed to some of the more popular ones. But also I like its approach. It's got a mix of quality, but also emphasis on valuations, so that tends to take you to the less risky part of the emerging markets. [The managers have] done a really good job and have had just good stock selection over the long haul. You've got good long-term risk-adjusted performance, and you have experienced managers. A lot of things you'd look for in any fund you'd find a fund like this, and it's still fairly small with about $3 billion in assets.

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