Two funds sold and two funds bought developing-world stocks during the region's bear market.
A version of this article was published in the July 2016 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
The recent emerging-markets bear market has left its imprint, at least in the short term, on some funds. Between the bear market's April 28, 2015, peak and its Jan. 21, 2016, trough, the MSCI Emerging Markets Index shed 34.1% of its value, with Brazil and China leading the race to the bottom. While their reasons for selling differed, two funds substantially cut their developing-markets footprints during that time and still got hammered. Two others had the temerity to buy in bulk, though only one benefited from the subsequent rebound through July 2016.
At the start of second-quarter 2015, Artisan International Small Cap ARTJX had a 31% emerging-markets stake (including South Korea and Taiwan), which ranked second out of roughly 40 foreign small/mid-growth Morningstar Category peers and was 13.4 percentage points more than the MSCI All-Country World ex USA SMID Growth Index. More than four fifths of that exposure was concentrated in seven Chinese stocks. One year later, longtime manager Mark Yockey had sold all of them, with most of the selling taking place in 2015's fourth quarter. Some of these stocks had been big winners for the fund in prior years. China Oil & Gas Group, however, proved costly; it was a big loser while the fund held it. Through July 2016, the fund's 2.3% loss over the past year places in the category's bottom half. Short-term underperformance is to be expected here, though. Yockey goes his own way in managing this closed fund's roughly 35- to 50-stock portfolio, and he's built a superior long-term track record doing so.
Between June and December 2015, Columbia Acorn International ACINX, with a Morningstar Analyst Rating of Silver, slashed its emerging-markets exposure by 13.2 percentage points to 17.8% of assets, near where it has remained since. Deteriorating fundamentals and underperforming small caps drove the steep drop, but management was also mindful of the emerging-markets weighting of the MSCI All-Country World ex USA SMID Index, which became the fund's new benchmark at the start of 2016. Selling too late in a downturn didn't help. Its 1.2% one-year loss through July 2016 ranks in the bottom half of its category. Managers Louis Mendes and Zach Egan, however, have earned investors' trust. They continue to use the same growth-driven and quality-oriented approach that has helped this fund to a peer-beating record since their May 2003 start date.
Over the past year through March 2016, Bronze-rated Manning & Napier World Opportunities EXWAX hiked its emerging-markets weighting by around 5 percentage points to 19.6% of assets, which was higher than a large majority of its roughly 200 foreign large-blend category peers. The shift toward the developing world was not indiscriminate. The fund sold several emerging-markets stocks during that time (Life Healthcare Group Holdings and LATAM Airlines Group in June; Charoen Pokphand Foods in September; and Qihoo 360 Technology in November) and trimmed several positions. In 2015, it added three names in such volume that the fund's emerging-markets stake grew significantly: China's Baidu BIDU (April) and Shandong Weigao Group Medical Polymer (May) and South Korea's Samsung Electronics (November). By July 2016, these three stocks accounted for 7.1% of assets. While the fund lost 2.5% over the trailing year through July 2016, it still placed in the category's top quintile. It has fared especially well in the emerging-markets rally since late January, though it's vulnerable to another downturn.
AMG Yacktman Focused YAFFX bought preferred shares of Samsung in 2015's second quarter and added more in the third. Samsung, which is domiciled in South Korea, is now the fund's biggest holding. (Some index providers consider South Korea an emerging market, while others consider it developed.) It and a modest position in China's Hengan International Group account for the fund's 14.0% emerging-markets stake, which was the third most out of 450-plus large-blend category peers as of July 2016. The fund posted a top-decile 9.0% gain over the past year through July 2016.