Check out these funds if you want to limit your emerging-markets exposure.
Emerging markets haven't escaped the pain that credit-related and other woes have caused the U.S. and European markets in recent months. Indeed, despite the hopes that the developing and developed worlds had decoupled from each other and that local economic growth would make up for sluggishness in the United States and Europe, most emerging markets have declined sharply since the current troubles began in late October. Diversified emerging-markets funds have lost 15% since Nov. 1, in fact, while Latin America offerings have dropped 10% and Pacific/Asia ex-Japan funds have plunged 23%.
Meanwhile, sharp sell-offs like this are fairly common for emerging markets. Diversified emerging-markets funds have suffered double-digit losses in 26 rolling three-month periods during the past 15 years, whereas Latin America offerings and Pacific/Asia ex-Japan funds have incurred losses like that slightly more often over the same period.
The painful short-term losses and extreme volatility associated with emerging markets no doubt make many conservative investors uncomfortable. But most foreign large-cap funds devote around 10% of their assets to emerging markets, and many prominent and successful ones--such as Harbor International HAINX and Masters' Select International MSILX--normally invest significantly more in such markets. Consequently, investors who want to avoid emerging markets need to choose their core international holdings carefully, as do those investors who wish to limit their exposure to such markets and get all of it through pure emerging-markets funds run by specialists.
Such investors do have a few excellent foreign large-cap options, though. Causeway International Value, Fidelity Spartan International Index, and Mainstay ICAP International all pay minuscule or zero attention to emerging markets, and they all have what it takes to be topnotch standalone or core foreign holdings. Here are the details on each.
Causeway International Value CIVVX
Don't be fooled by this foreign large-value fund's subpar returns over the past three years. Those results have a lot to do with the facts that emerging markets soared during most of the period and that this fund almost completely avoids such markets. In fact, the only emerging markets in its universe are Korea and Taiwan--which many consider to be developed exchanges--and its managers have never invested more than a small amount in the former and have yet to invest in the latter. Meanwhile, the managers have produced good risk-adjusted returns over this fund's six-year lifespan with their strict value strategy, and they produced similarly attractive results over a longer stretch at a former charge using the same discipline. The overall strength and experience of this fund's management team is another plus, as is Causeway Capital Management's commitment to its fundholders. Thus, this fund is a terrific option for investors who want a foreign large-cap offering with minimal emerging-markets exposure.
Fidelity Spartan International Index FSIIX
This foreign large-blend fund tracks the MSCI EAFE Index, so it avoids emerging markets completely. It has posted only average gains over the past three years, partly due to its complete commitment to developed markets, but it has earned good returns over the long run. This fund has beaten two thirds of its category rivals over the trailing five- and 10-year periods, in fact, thanks primarily to its low costs. Its 0.10% expense ratio provides it with a small to medium advantage over other international index funds and a big advantage over actively managed foreign funds. These traits make the fund an excellent choice for cost-conscious investors who would like a pure developed-markets vehicle to own as the sole or central holding in their foreign portfolio.
Mainstay ICAP International ICEUX
This foreign large-value fund's attributes speak for themselves. It boasts top-quintile three-year, five-year, and 10-year returns. Its management team builds atypical country and sector weights and runs a compact portfolio of 35 to 45 names as it pursues undervalued blue chips with catalysts for growth, so its strategy is distinctive as well as sound. The team remains strong and seasoned despite the passing of former lead manager Rob Lyon in July 2007. All this--plus the facts that the team normally pays little if any attention to emerging-markets stocks and the only such names that it owns tend to be global leaders from relatively established markets like Samsung Electronics and Taiwan Semiconductor Manufacturing--means that this fund is worth a long look from investors seeking a standalone or core foreign holding that's dedicated to developed markets. (Please note that while the cheap, no-load share class of the fund is now out of reach for most investors because of its high minimum investment, there is a front-load share class with an attractive expense ratio and a modest minimum investment available for those who use investment advisors.)
William Samuel Rocco is a fund analyst with Morningstar.
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