Surprises Galore in Boring Old Emerging-Markets Funds

In recent years, fund companies have created a variety of new ways for investors to gain exposure to emerging markets. We've written extensively about the different approaches. For example, we've discussed the emergence of funds that focus on so-called "frontier" markets, as well as those that specifically target emerging-markets small caps. We've also paid attention to the rise of funds that take the traditional balanced or multiasset approach and apply it to the emerging-markets universe and those that fill their portfolios with bonds denominated in local emerging-markets currencies.

Amid all of the new options, though, the more-traditional type of emerging-markets fund remains a viable choice. But it's important to recognize that even these old standbys provide a wide variety of approaches for investors. In fact, straightforward emerging-markets stock funds sometimes have little in common with one another. Because distinctions in a fund's makeup and strategy have important effects on performance, and certain approaches may not match an investor's preference, it's important to discern and understand the differences before investing.

That applies to all funds, of course, but is worth special emphasis here. For at times it seems that investors put so much weight on the percentage of assets allocated to emerging markets that the specific vehicle is considered of little importance. A comparison between Nuveen Tradewinds Emerging Markets , Acadian Emerging Markets (AEMGX), and Templeton Developing Markets (TEDMX), though, shows how funds with ostensibly similar, broadly conventional emerging-markets mandates can differ markedly in both makeup and performance.

Take Your Pick
The Nuveen Tradewinds offering takes the most unusual approach among this group. It is a true all-cap portfolio, which is rare in any equity-fund category. The fund has meaningful percentages of assets in all five market-capitalization levels as measured by Morningstar, from micro (7% of assets) and small (23%), to mid-cap (29%), to large (28%) and giant (12%). Notably, it has 22% of assets in basic materials (nearly double the category average), but just 1% in technology (the average is 14%).

The portfolio's geographic distribution of assets also stands out. It has exposure to many frontier markets in Africa and the Middle East, such as Nigeria, Kenya, and Lebanon, but treads very lightly in some of the biggest and most-established emerging markets, such as South Korea and China.

Acadian Emerging Markets, whose managers rely largely on quantitative models to assemble the portfolio, could hardly provide a greater contrast. At more than $12 billion, its average market cap is 4 times greater than that of the Nuveen fund, though that still leaves it below the category average. Its stake in the basic materials sector is fairly conventional, at 11% of assets, and instead of practically shunning technology, Acadian stashes almost 20% of assets in that sector, far surpassing even the generous category average.

Meanwhile, Acadian Emerging Markets is much less adventurous geographically than the Nuveen fund. It has large weightings in the dominant emerging markets of South Korea, China, and Brazil, and almost completely avoids frontier markets. That's not to say it simply follows the crowd. For example, the fund has 6% of assets in Thailand and nearly 7% in Turkey, roughly double the category averages in both cases.

For yet another take, check out Templeton Developing Markets, one of the oldest emerging-markets funds. With this portfolio, shareholders get a huge 16% stake in Russia, versus 9% in the Nuveen fund and 5% in Acadian (the latter is near the group norm). Focused primarily on the biggest stocks, Templeton's fund has a market cap of nearly $30 billion, dwarfing those of both its rivals and the category average. And while the Nuveen and Acadian funds have fairly similar stakes in the energy sector, resting close to the category norm of 12.5%, the Templeton managers have poured about 22% of assets into that field.

Choose Wisely
The different portfolios have provided vastly different results thus far in 2012. Nuveen Tradewinds Emerging Markets is having a terrible year. Its 7.2% loss through Aug. 9 is the worst of any diversified emerging-markets fund, save for one leveraged index portfolio. Templeton Developing Markets' performance is better than that, but not impressive either. Its 3.9% gain so far this year lags well behind the category average. Acadian Emerging Markets, by contrast, is up 11.4%, good enough to land in the category's top quartile.

One reason for the dispersion in returns: the large basic materials and energy stakes weighing down the Nuveen and Templeton funds at a time of economic pessimism and falling commodity prices. Stock-specific factors also come into play. Acadian's two top holdings, Samsung Electronics and China Mobile, which take up 9% of assets combined, have risen sharply this year. Both of these giants are entirely absent from the Nuveen or Templeton portfolios.

This year's results do not, of course, mean the Acadian fund will outperform every year, or that the other funds' approaches are inherently flawed. The Nuveen fund had strong relative rankings in 2009 and 2010, in fact, before stumbling the last two years. And these are just three options; other funds offer still other takes on this field.

Moreover, portfolio makeup is only one aspect of a fund. Investors also should compare management, investment style, and cost when evaluating potential picks. As these examples show, even old-fashioned emerging-markets funds are far from interchangeable. For the record, that applies even to index-trackers. But that's a topic for another day.