When Fund Names Don't Tell the Whole Story
Be sure to check the contents before buying.
A few years ago, the SEC tightened the rule that requires mutual funds to invest in what their names indicate they own. In response, many funds either shuffled their holdings to better reflect their names and mandates or adopted new names and altered their mandates.
Even now, though, one can't always tell for sure what a fund invests in simply from looking at its name. Not that we think that every fund should adopt "Large Cap Core" or a similarly specific--and dull--moniker. In fact, the freedom allowed by vague names such as "Clipper Fund" has its benefits. But be aware that more-specific names still allow wiggle room, and it therefore pays to do your research.
That's especially true with international funds whose names cite a certain region or subregion. We've found a few whose portfolios might surprise an unsuspecting investor who didn't check the contents before buying. To be clear, these funds aren't breaking any rules. The point is to impress upon you the importance of checking under the hood even when a fund's name seems to tell all.
Fidelity Southeast Asia (FSEAX)
Given that even formal boundaries between countries can be disputed, it's no surprise that the demarcations between regions often are less than clear-cut. But by any definition, it's hard to squeeze Korea into Southeast Asia. So, investors buying Fidelity Southeast Asia might reasonably assume that the fund would focus on countries located much further down on the ol' wall map. But look: According to Fidelity's figures, at the end of 2007 this fund devoted nearly 30% of this fund's assets to Korea, more than any other market.
The explanation, says a Fidelity representative, is that the fund's prospectus defines the "Southeast Asia" mandate to include companies that are tied economically to the region, even if they aren't headquartered there. Moreover, the fund's benchmark includes a hefty Korea weighting. (The Fidelity representative says that the benchmark was selected because it was the best available choice at the time.) So, it's understandable why the manager has taken this course. That said, given the fund's name, its holdings may surprise or disappoint those investors who think they're buying a portfolio limited to markets actually located in Southeast Asia--and who aren't looking for an extra dose of Samsung Electronics.
T. Rowe Price Africa & Middle East (TRAMX)
At first glance, it may seem like there's nothing unusual here: Besides a cash stake, all of the fund's money is invested in Africa and the Middle East. But look further before buying. The fund's name might intrigue investors who've heard about growth rates in certain sub-Saharan countries that defy the general public's stereotypical view of the region as unfit for serious investment. But this vehicle won't help you jump on that trend--at least for now.
In the Jan. 31, 2008, portfolio, the only sub-Saharan market represented (except for the well- established South African market, which features prominently in broad emerging-markets funds) is a 1.4% stake in Nigeria. Even South Africa gets only a 9% allocation. Other than that, the entire portfolio is in the United Arab Emirates, Egypt, and other states in the Middle East.
There's nothing untoward about this allocation. After all, the Middle East is in the fund's name, and geographically speaking, Egypt (currently 19% of assets) is located in Africa. Moreover, a T. Rowe Price representative says that the fund's analysts recently visited several sub-Saharan countries to evaluate the opportunities, adding that that area will likely play a more substantial role in the portfolio in the future. The reason that it makes up so little of the portfolio now, he says, is that valuations currently are more attractive in Middle East markets and those markets are also more liquid--that is, it's easier to find enough shares to buy and sell with ease there than in Africa.
At some point this may become more of an Africa fund. For now, though, it's best to ignore the name and think of it as a Middle East vehicle first.
Vanguard Pacific Stock Index (VPACX)
This fund is mainly a Japan and Australia portfolio. In fact, it's not unusual for nearly 90% of assets to be in those two countries, with the vast majority in Japan. The rest of the portfolio consists only of stakes in Hong Kong, Singapore, and New Zealand. As far as this fund is concerned, the Pacific region doesn't include China, Taiwan, Korea, Indonesia, or any other market that you might expect to pop up here.
Why such an unusual mix? Because that's how the fund's MSCI benchmark is constructed. The fund's mission is to match that benchmark, and it has accomplished that quite successfully over time. If you're looking for broader exposure to the region, though, look elsewhere.
Latin America Funds
Portfolios devoted to Latin America find themselves in a similar situation. While they do invest all of their assets in the region cited in their names, they won't fit the bill for anyone who wants exposure to a broad range of Latin American countries, including less-common markets such as Peru or Ecuador. Even bigger countries such as Chile and Argentina get short shrift.
No, for Latin America funds, Latin America overwhelmingly means just Brazil and Mexico. In fact, for every Latin America regional fund--excluding those devoted to just one country--roughly 90% of assets currently goes to those two markets alone. Chile gets a 4% or 5% stake, if that. Peru and Argentina get less, if they're represented at all. And you'll be lucky to see any other countries show up in the portfolio. Those allocations haven't stopped these funds from racking up massive gains in recent years. But shareholders must be willing to accept a lopsided portfolio, in country terms, if they jump into one of these.
Doing the Homework
These funds aren't the only ones requiring research before purchase. In fact, you should look at any fund's portfolio before you invest, even if it's not a sector or regional fund, just to ensure that you're comfortable with it. One way to do that is to look at the fund's Quicktake on Morningstar.com, which provides the names of the top securities in the portfolio as well as a breakdown by sector and other factors, including country and region weightings for international funds. In addition, many of the funds' own Web sites have made vast improvements in providing that type of information. It's worth taking the time to look. A little bit of research can save you a lot of surprises down the road.
Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.