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Foreign Fund Insight: Spread Your Bets

Single-country funds should be treated with caution.

William Samuel Rocco, 02/27/2002

<P>Despite global volatility in the past year, many single-country emerging-markets funds have soared.</P> <P>For example, both open-end Russia funds rank among the top 10 one-year performers--including Pilgrim Russia <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>LETRX</MSTR:SECURITY>, which is up a chart-topping 74%--as enthusiasm about that market and its many commodity-oriented companies has surged. A couple of Korea offerings have also skyrocketed, thanks to the strength of the local economy and growing confidence in the governmental and corporate reform efforts. And though they're not in the top 10, several other single-country emerging-markets funds and ETFs--including Matthews China <MSTR:SECURITY>MCHFX</MSTR:SECURITY> and iShares MSCI Mexico (Free) Index <MSTR:SECURITY>EWW</MSTR:SECURITY>--have posted strong gains over the past 12 months. </P> <P> <TABLE cellSpacing="0" cellPadding="0" border="0" > <FONT face="Trebuchet MS" color="#ffffff" size="-2" ><B><FONT face="Trebuchet MS, Arial, Helvetica" color="#ffffff" size="-2" ><B>Single-Country Emerging-Markets Funds Dominate International Leaders' Board</B></FONT></B> </FONT></TD> <TD><IMG height="1"1 src="http://im.morningstar.com/im/dot_clear.gif" width=1></TD> <TD><IMG height=5 src="http://im.morningstar.com/im/dot_clear.gif" width=242></TD> <TD><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=180></TD> <TD><FONT face="Trebuchet MS" color=#999999 size="-2" ><B> </B> </FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS" color=#999999 size="-2" ><B>1-Year Return<BR>( % )</B></FONT></TD> <TD colSpan=2><IMG height=5 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD><FONT face="Trebuchet MS" size="-2" >Pilgrim Russia <A href="http://quote.morningstar.com/switch.html?ticker=LETRX" >LETRX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >74.05</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Matthews Korea <A href="http://quote.morningstar.com/switch.html?ticker=MAKOX" >MAKOX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >54.95</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Fidelity Advisor Korea <A href="http://quote.morningstar.com/switch.html?ticker=FAKAX" >FAKAX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >30.04</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Regent Eastern European <A href="http://quote.morningstar.com/switch.html?ticker=EUROX" >EUROX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >27.90</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Pictet Eastern Europe <A href="http://quote.morningstar.com/switch.html?ticker=PTEEX" >PTEEX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >26.11</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Third Millennium Russia <A href="http://quote.morningstar.com/switch.html?ticker=TMRFX" >TMRFX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >20.55</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Matthews Asia Growth & Income <A href="http://quote.morningstar.com/switch.html?ticker=MACSX" >MACSX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >13.28</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Oakmark Global <A href="http://quote.morningstar.com/switch.html?ticker=OAKGX" >OAKGX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >12.76</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Commonwealth New Zealand <A href="http://quote.morningstar.com/switch.html?ticker=CNZLX" >CNZLX</A> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >12.05</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" >Eaton Vance Asian Small Co </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" >11.43</FONT></TD> <TD colSpan=2><FONT size="-2" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></FONT></TD> <TD><FONT face="Trebuchet MS" size="-2" ><STRONG>International Fund Average</STRONG> </FONT></TD> <TD align=right><FONT face="Trebuchet MS" size="-2" ><STRONG>-16.84</STRONG></FONT></TD> <TD colSpan=2><IMG height=9 src="http://im.morningstar.com/im/422x9rule.gif" width=422></TD> <TD><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=1></TD> <TD colSpan=2><FONT face="Trebuchet MS, Arial" color=#999999 size="-2" >Data as of 02-22-02. </FONT></TD></TABLE></P> <P>These returns might look pretty attractive to investors right now, especially relative to the losses that most diversified international-stock offerings have suffered. But it's important to be aware that these and other single-country emerging-markets funds are incredibly risky. </P> <P>Dizzying short-term and mid-term losses are facts of life with such offerings. Both of the Korea funds plunged more than 60% in the fourth quarter of 1997, when the Asian currency crisis leveled their home market. And Pilgrim Russia lost a staggering 83% of its value in 1998, as the Russian exchange imploded. (Third Millennium Russia <MSTR:SECURITY>TMRFX</MSTR:SECURITY> didn’t open until October 1998, so it missed most, but not all, of that year's precipitous downturn.)  /?>Overall, these funds have been two to nearly five times as volatile as the typical international-stock offering. Thus, though some of these funds have pretty good longer-term returns, their extreme risks make them unsuitable for all but the most daring investors. </P> <P> <TABLE cellSpacing="0" cellPadding="0" width=422 border="0" > <TD vAlign="bottom" align="left" bgColor="#999999" colSpan=5><FONT face="Trebuchet MS, Arial, Helvetica" color="#ffffff" size="-2" ><B>Single-Country Emerging-Markets Funds Are Wild </B></FONT></TD> <TD vAlign="bottom" align=right><IMG height=5 src="http://im.morningstar.com/im/dot_clear.gif" width=135></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=72></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=73></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=69></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=73></TD> <TD vAlign="top" align=right> </TD> <TD vAlign="top" align=right> <P><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Worst Calendar<BR>Quarter<BR>( % )</B></FONT></P></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Worst<BR>Calendar<BR>Year<BR>( % )</B></FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>3-Year<BR>Standard<BR>Deviation</B></FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>5-Year<BR>Standard<BR>Deviation</B></FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=5 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Pilgrim Russia <MSTR:SECURITY>LETRX</MSTR:SECURITY> </FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-33.89</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-81.00</FONT></TD> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >93.37</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >75.47</FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Matthews Korea <MSTR:SECURITY>MAKOX</MSTR:SECURITY> </FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-63.44</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-64.70</FONT></TD> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >59.01</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >70.02</FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Fidelity Advisor Korea <MSTR:SECURITY>FAKAX</MSTR:SECURITY> </FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-61.57</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-64.60</FONT></TD> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >58.77</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >74.39</FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Third Millenium Russia <MSTR:SECURITY>TMRFX</MSTR:SECURITY> </FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >-34.94</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >-29.40</FONT></TD> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >84.53</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >N/A</FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Matthews China <MSTR:SECURITY>MCHFX</MSTR:SECURITY> </FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >-32.70</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >-6.70</FONT></TD> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >47.17</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >N/A</FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >iShares MSCI Mexico <MSTR:SECURITY>EWW</MSTR:SECURITY> </FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >-24.30</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >-35.00</FONT></TD> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >38.04</FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >40.70</FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><STRONG>International Fund Average </STRONG></FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><STRONG>-17.09</STRONG></FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><STRONG>-17.79</STRONG></FONT></TD> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><STRONG>22.66</STRONG></FONT></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" ><STRONG>22.66</STRONG></FONT></TD> <TD vAlign="top" align=right colSpan=5><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align=right colSpan=5><IMG height=9 src="http://im.morningstar.com/im/422x9rule.gif" width=422></TD> <TD vAlign="bottom" align="left" colSpan=5><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" >Data as of 01-31-02.</FONT></TD></TABLE></P> <P>Don't despair: Investors who want to get significant exposure to Mexico, Korea, China, or Russia have safer options. Most Latin America offerings keep 30% to 50% of their assets in Mexico, and most Pacific/Asia ex-Japan offerings devote ample portions of their portfolio to Korea and China. And though most pan-Europe funds tend to ignore Russia, there are a couple of Eastern Europe offerings that pay a lot of attention to that market. </P> <P>Diversified emerging-markets funds are a tad less volatile than these regional offerings and all of them maintain sizable stakes in Mexico and Korea. It's true that a few, such as Oppenheimer Developing Markets <MSTR:SECURITY>ODMAX</MSTR:SECURITY>, avoid China and Russia, but most have some exposure to both markets.</P> <P>Finally, the safest way to play one or more of these four markets is through a foreign-stock fund that maintains an oversized emerging-markets position. There are several such funds with good long-term records. Most of them readily invest in Mexico, Korea, and China, and have often ventured to Russia. /?></P>

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