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By Robert Johnson, CFA | 09-17-2014 12:00 PM

Bad Timing Burns Emerging-Markets Investors

Fund-flow data show investors arriving late to the party as they've chased performance in emerging and then developed markets over the last several years.

Bob Johnson: This week's chart focuses on fund flows in emerging markets compared with the fund flows into the developed markets. The chart shows a very steady growth in flow of funds into emerging markets that began in 2009. We saw relatively steady increases and then a slowdown in flows after 2012 to a more normal level.

Meanwhile, the flows in the developed markets really didn't grow nearly as fast coming out of the recession and then had a sharp acceleration in 2013, as people suddenly realized the benefits of investing in developed markets.

Why did all of this happen? Emerging markets--people flocked back to them after the recession. They were the best performers before the recession. They came through the recession, many of them, actually unscathed and having few of the problems from the slowdown that the rest of the world was seeing. And if you add diversification benefits and higher growth rates to that, people were very interested in investing in emerging-markets funds--hence the flows.

Meanwhile, the developed markets were stuck with a terrible recession hit and a slow expected recovery. But instead, the U.S. in particular did very well, and Europe finally got their act together toward the end of the period. And so, they really began to perform very well unexpectedly, and people then raced back in to developed-markets funds. And we saw a huge spike in 2013 in investor interest.

Lo and behold, investment performance went just the opposite. While people were pouring money into emerging-markets funds in 2009-13, the money was to be made in the developed markets, which did substantially better than emerging markets--which, in turn, basically didn't do much at all during that timeframe.

So, what's happened since then? Well, since everybody poured the money back into the developed markets--lo and behold--the emerging markets have begun to catch fire again and have been the best performer recently. It just goes to show that you shouldn't be chasing performance; instead, go with a steady investment approach.

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