Top International Funds Betting on Hard-Hit Emerging Markets

Fund investors are famously fickle, often dropping out-of-favor offerings in favor of those that have generated strong recent returns. Given that recurrent tendency, recent asset inflows into emerging-markets funds are downright anomalous. Even though the typical diversified emerging-markets fund lost 20% of its value last year, funds in the group raked in nearly $20 billion in new assets during the year's first 11 months.

You've got to laud investors' contrarian instincts. Given that valuation is the best predictor of market performance, it's certainly better to buy emerging markets after a performance hiccup than it is after a period of scorching returns. That said, worries over emerging markets can't be shrugged off entirely, even if the case for long-term growth in these economies remains intact. As senior analyst Gregg Wolper notes in this article, worries over slowing growth and rising inflation have weighed on the Indian market, Chinese stocks have been buffeted by concerns over a real estate bubble and government efforts to slow growth, and the Brazilian market has struggled with worries over what a China slowdown would mean for its natural-resources-intensive economy.

Given that backdrop, as well as the periodic sell-offs that have long been part and parcel of investing in emerging markets, I've been a fan of skipping dedicated emerging-markets vehicles in favor of offerings that can graze across both developed and developing markets. That way, your managers have the latitude to pull back on emerging markets when they appear to be overheating but add to them when valuations look more attractive.

With an eye toward unearthing the best broadly diversified foreign- and world-stock funds with an emphasis on emerging markets, I turned to our  Premium Fund Screener. I started with what I consider to be the core international-stock categories: foreign large value, blend, and growth, as well as world stock. (World-stock funds make room for U.S. stocks, though most stake more than half of their assets overseas.) Within that group, I screened for the subset with a decent slug of emerging markets--10%-25% of their most recently available portfolios. (For a bit of context, the typical fund in most of these groups stakes 7%-8% in emerging markets.) To help narrow our list to those offerings that look good to our fund analysts on a bottom-up basis--those with strong management teams, good stewardship, sensible processes, and so forth--I screened on those offerings with Morningstar Analyst Ratings of Silver or higher.

The resulting list of offerings is eclectic, featuring funds that span the investment-style universe and vary by risk level. Premium users can click  here to view the screen and its output; here's a look at some of the funds that made the cut.

 Litman Gregory Masters' International (MSILX)
In many respects, this is an ideal one-stop international fund. In addition to maintaining exposure to both developed and developing markets, it is also diversified across the style spectrum as a result of its multimanager approach. Advisor Litman Gregory employs six seasoned managers, including Oakmark's David Herro and Third Avenue's Amit Wadhwaney; each, in turn, contributes eight to 15 stock picks. Morningstar senior analyst Bill Rocco notes that the portfolio tends to include exposure to emerging markets and small caps, both of which contributed to above-average losses last year. Over time, however, the fund's talented managers have delivered a pleasing risk/reward profile.

 Manning & Napier World Opportunities 
Like the Litman Gregory fund, this offering didn't turn in its best campaign in 2011. Its managers avoided the hard-hit financials sector but still got caught with disappointing individual holdings like  Carrefour (CA). An above-average emerging-markets stake didn’t help matters as investors fled to the perceived safety of developed-markets blue chips during the third quarter. Yet Morningstar analyst Katie Rushkewicz Reichart argues that the long-term case for this fund is sound. She likes that its nine managers have an average of 17 years at the firm, and their focus on companies that are trading cheaply on an absolute basis is also sensible.

 T. Rowe Price International Stock (PRITX)
With more than 23% of its assets in emerging-markets stocks, this fund's weighting is one of the largest of any fund that made it through our screen. Manager Bob Smith believes emerging-markets firms will continue to see strong earnings and cash flow growth, so he's sticking with his sizable weighting there despite subpar results in 2011. Over long periods of time, Smith's charges (he ran  T. Rowe Price Growth Stock (PRGFX) before taking over here) have tended to deliver better-than-average performance in market rallies and below-average results in weak periods. Those comfortable with that risk/reward profile--and the broad leeway that Smith has to diverge from his MSCI All Country World ex-US Index--will find a lot to like here, including T. Rowe's deep analyst resources and fundholder-friendly culture.