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Fund Spy

Foreign Funds With Big Appetites for Emerging Markets

Quite a few diversified stock funds have significant exposure to the booming developing world.

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Emerging markets have been hot lately. The developed markets of the United States and Europe are recovering slowly from the Great Recession, thanks to heavy debt loads and continuing uncertainty. Emerging markets such as China, India, and Brazil have been generating most of the world economy's growth in recent years, a trend that many expect will become even more pronounced going forward. The U.S. Federal Reserve's expansive monetary policy, designed to boost the sluggish U.S. economy, has had a side effect of stoking the emerging-markets boom.

Investors have reacted by pouring money into emerging-market investments, with much of that money coming from traditional core asset classes. Through the first nine months of 2010, emerging-markets stock and bond mutual funds garnered net inflows of nearly $33 billion, while domestic large-cap stock funds had net outflows of more than $60 billion, with much of that coming from large-growth funds. Morningstar recently introduced a new China Region category as a result of the proliferation of China funds.

Of course, the popularity of emerging markets doesn't mean that they'll continue to do well--and could be seen as a contrarian indicator. Morningstar's annual "Buy the Unloved" study has found that fund categories with the biggest inflows in a given year tend to underperform over the following three to five years relative to categories with the biggest outflows. China's recent decision to raise interest rates to slow growth spooked investors and illustrates the risks involved. Nevertheless, there's no shortage of smart investors betting on the long-term potential of emerging markets.

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David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.