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Fund Times: Developments in the Emerging-Markets Arena

Plus, news on high-yield defaults, Evergreen, Calvert, Matthews, MainStay, Turner, and more.

Morningstar Analysts, 08/21/2006

Emerging-market country debt has seen significant changes in recent years, as PIMCO executive vice president Curtis Mewbourne explained in his recent Emerging Markets Watch column.

For starters, natural-resource-rich emerging-markets countries have greatly benefited from record-high commodities price levels in recent years, which have resulted in both improved sovereign balance sheets and increased debt reduction in the sovereign-bond sector. Debt reduction in countries such as Brazil, Columbia, and Venezuela, for instance, has amounted to more than $30 billion overall this year, according to Mewbourne. This, when coupled with lower levels of sovereign-debt issuance, improvements in governmental balance sheets, and heightened credit-quality ratings, has highlighted the significant changes going on in this market.

As this market matures, he argued, investment opportunities will "fall mainly in two areas, namely corporate and local market investments." In fact, the growing corporate emerging-markets sector, according to Mewbourne, eclipsed sovereign-bond issuance for the first time ever in 2005. Overall, he stated: "The EM [emerging markets] asset class is undergoing an important structural change, namely an expansion of corporate financing and a migration from external to domestic financing. At present, these markets are still in the early phase of their development, and periodic volatility and sharp corrections can be expected. But over the long run, it is very likely that investors will want to migrate more of their allocations away from shrinking G-3 economies and toward many of these emerging market countries and companies."

We've also seen some other fund shops recently alter emerging-markets mandates to aid management in taking advantage of this changing market landscape. AllianceBernstein Emerging Market Debt AGDAX, for instance, changed its mandate in late 2005 to allow investment in non-U.S.-dollar denominated debt. Previously, it could only hold emerging-markets issues denominated in dollars. Additionally, the fund also holds a 19% position in corporate emerging-markets bonds. As markets continue to evolve and change, it will be the funds that can best adapt to these changes that will find success.

Timing Your Dollar-Cost Averaging

A paper in the fall 2006 issue of The Journal of Wealth Management, by John Paglia and Xiaoyang Jiang, argues that you can market-time your dollar-cost averaging contributions. This may seem counterintuitive to many, because dollar-cost averaging strategies (where investments are made in regular amounts at fixed intervals in time) are typically seen as an alternative to market-timing, which history suggests investors perform poorly. The authors suggest that the date of the month on which investors contribute money can affect their longer-term portfolio return outcome.

Studying a period from Jan. 1, 1990, to Dec. 31, 2005, the authors concluded that "the best day of the month to invest in Nasdaq, Dow Jones Industrial Average, and S&P 500 is the 23rd day of each month. For all three indices, the average portfolio returns consistently invested on the same day between the 22nd and 25th of each month are higher than the rest of the month."

They ascribed this effect to the biweekly payment schedules followed by many U.S. companies. Of course, like with many historical market phenomena, just because the strategy has worked in the past does not mean that it will continue to operate in the same way going forward. This would be particularly true if institutional investors attempted to take advantage of the effect, which over time may make its usefulness more muted.PAGEBREAK

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