Two Quick Tips for Busy Fund Investors

It's June. It's hot. It's time for the beach. Your attention is divided between the ball game on TV and the water balloon your kid just tossed at your head. And you're trying to find the airline tickets you just had in your hand while simultaneously checking the radar to see if that nasty line of thunderstorms is still headed your way.

Amid this multitude of summertime concerns, it would be presumptuous to demand too much of your time. So this is a fine occasion for a column offering a couple of useful tips that don't require a long attention span.

Looking beyond the Stock Markets
The traditional argument in favor of owning emerging-markets funds is that they'll provide outsized long-term returns that more than offset their extensive risk. Do they actually fulfill that promise? Right now, a look at the 10-year performance chart does not support this case. Through the end of May 2004, the top-ranked fund in the diversified-emerging-markets category over the trailing 10-year period--GMO Emerging Markets III (GMOEX)--has an annualized return of 5.3% over that stretch. That's less than half the S&P 500's return. The category average is a mere 1.6%.

Case closed? Not quite. Take a look at the emerging-markets bond category. The picture is much rosier there. The 10-year chart shows a category average of 11.5%, a bit better than the S&P 500, and several funds are much higher than that. The top two are GMO Emerging Country Debt III (GMCDX) and  Fidelity New Markets Income (FNMIX). The latter fund boasts a 13.1% annualized trailing 10-year return. By contrast, the firm's emerging-markets stock offering,  Fidelity Emerging Markets (FEMKX), has suffered a 4.0% annualized loss for that same period. (The stock fund has its own mistakes to blame for the depth of that disparity, in addition to the performance of its asset class.)

Of course, there's no guarantee this relationship will hold. But it's worth noting that the emerging-markets bond category also has been substantially less volatile, as measured by standard deviation, than the emerging-markets stock grouping over the long term. One could argue that that specific trend has a strong likelihood of continuing. A more-detailed discussion of that point, and the overall merits and risks of emerging-markets bond funds, can be found in a column we wrote last summer.

The main point: Keep in mind the bond side if you're considering investing in an emerging-markets fund. Premium members can look here for our favorite offerings in that category and a review of recent events in the field.

Know What You Own, Even Far From Home
One of the most helpful pieces of investment advice is to know what your funds own. This tenet applies even to the most esoteric investments. For example, from reader questions and comments over the years, we've learned that many investors consider all single-country funds--even those that are actively managed--to be nothing more than index-trackers. (Unless the country the fund targets is the United States, in which case people understand quite well how diverse the choices can be.)

Such folks see no reason to find out how the makeup of a particular single-country fund's portfolio differs from that of its relevant index, or from those of rival funds that focus on the same market. But the truth is that these funds aren't always interchangeable.

For proof, take a look at the recent performance of two Russia funds. After a long and powerful rally, the Russian market has plunged in the past couple of months, owing partly to the deepening political and financial troubles swirling around market heavyweight Yukos Oil. At the end of April, one Russia fund,  ING Russia , had more than 14% of its assets stashed in Yukos, which was its top holding. That fund has dropped 13.4% in the three months through June 4, 2004, and now has a scant 0.6% gain for the year to date.

By contrast, a rival offering, Third Millennium Russia , didn't even have Yukos in its top 10 at April's end. And it had a vastly different portfolio in other respects as well. Third Millennium has lost just 8.8% over the past three months and has a much healthier 9.9% gain for the year.

Even when you're just taking a flyer, it pays to know what you're flying.