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3 Promising Diversified Emerging-Markets Funds

These young funds have a lot going for them. 

William Samuel Rocco, 06/04/2013

The diversified emerging-markets category continues to expand at a rapid clip. A total of 69 new funds have opened in the category in the past three years, which is roughly the same amount as have opened across the six foreign-stock groups (large-value, small/mid-blend, and so on) and twice as many as have opened within the seven other regional international-stock categories during the period.

Most of the young diversified emerging-markets funds can safely be ignored at this point for one reason or another. Their track records are short, and often their managers and strategies haven't already established their emerging-markets bona fides on other offerings. Several of the new offerings that do have proven managers and strategies have really high expense ratios.

But some of the emerging-markets funds that have opened in recent years merit attention. Columbia Acorn Emerging Markets CAGAX, Seafarer Overseas Growth & Income SFGIX, and Thomas White Emerging Markets TWEMX have several factors in their favor and are worth checking out despite their youth. Here are the details on each.

Columbia Acorn Emerging Markets CAGAX 
This 21-month-old fund, which focuses on smaller-cap growth stocks in the developing world, has a strong foundation. Its advisor, Wanger Asset Management, specializes in small- and mid-cap growth investing and has a strong track record in that field. This fund relies on the same sound, quality-oriented stock-selection strategy as the other funds in its advisor's lineup, including Silver-rated Columbia Acorn International LAIAX, a foreign small/mid-growth fund with a long and successful history of investing sizable amounts in emerging-markets stocks. And this fund is managed by four Wanger veterans who have lots of emerging-markets experience and who have played major roles in the success of Columbia Acorn International. Fritz Kaegi and Stephen Kusmierczak, who are the lead managers on this fund, have long selected stocks in their areas of expertise for the International fund, while Zach Egan and Louis Mendes, who serve as comanagers on this fund, have been the lead managers on Columbia Acorn International since 2003.

The managers have executed the family's quality growth discipline deftly during this fund's short history. Thanks in large part to the strength of their consumer cyclical picks, including the Cambodian casino operator NagaCorp and Ace Hardware Indonesia, this fund earned a 15.6% annualized gain from its August 2011 inception through May 29, 2013, while the MSCI Emerging Markets Small Cap Index posted a 7.2% annualized return and the typical smaller-cap diversified emerging-markets offering delivered a 10.4% annualized gain. And the managers' strategy leads to a distinctive portfolio with a nice mix of bolder and tamer traits, so this fund has the potential to build on its strong start and produce good risk-adjusted returns over the long run. 

Seafarer Overseas Growth & Income SFGIX
This diversified emerging-markets fund is in the hands of a seasoned and skilled skipper. Before founding Seafarer Capital Partners in early 2011, Andrew Foster spent more than a decade at Matthews International Capital Management. There he served as director of research for several years, as acting chief investment officer for a couple of years, and as a portfolio manager on various emerging-Asia funds. His record as a portfolio manager there--which includes multiyear stints as the lead manager of Matthews India MINDX and Matthews Asian Growth & Income MACSX--was quite strong overall.

Foster is using essentially the same strategy at this fund as he used at Matthews Asian Growth & Income. He is looking for sustainable growers that are reaping strong cash profits and are paying dividends or buying back their shares. He considers preferred stocks, convertible bonds, and corporate bonds as well as common stocks, takes a benchmark-agnostic approach, and moves at a measured pace. 

This distinctive approach has delivered impressive long-term risk-adjusted returns at Matthews Asian Growth & Income, and Foster has earned excellent results with it during this fund's first 15 months. This fund posted a 16.3% annualized gain from its February 2012 inception through May 29, 2013, while the MSCI Emerging Markets Index incurred a 0.2% annualized loss and the average diversified emerging-markets fund produced a 3.3% annualized gain over this period. And Seafarer Capital Partners has put in place an expense waiver that caps this fund's expense ratio at 1.40%, which is 8 basis points below the median of 1.48% for no-load emerging-markets funds. 

William Samuel Rocco is a senior fund analyst with Morningstar. He would like to hear from you, but he cannot provide individual-portfolio or financial-planning advice.
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