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Rekenthaler Report

A Glimmer of Hope for Emerging-Markets Stock Funds

Sentiment may be starting to turn.

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It's Good to be Disliked
In mutual fund investing, popular children are to be shunned. As a general rule, fund categories that enjoy high net cash inflows tend to perform relatively poorly over the next several years, while those that suffer net redemptions usually fare well. This upside-down behavior is not restricted to U.S. mutual funds. Across the globe and among various asset classes, investor sentiment is a useful indicator for a security's future prospects.

Recent sentiment has not favored emerging-markets stock funds. As Russ Kinnel, Morningstar's director of mutual fund research, points out, U.S. emerging-markets funds have been bucking the usual pattern that weak performance leads to cash outflows. The category roared back from its 2008 losses with a big gain in 2009, but since then it has been treading water and has trailed pretty much all U.S. stock and bond categories. Meanwhile, cash keeps flooding in. Over the past three years, net flows into U.S. mutual funds and exchange-traded funds investing in diversified emerging-markets stocks have been nearly $140 billion, ranking the category second for inflows only behind intermediate-term bond funds (that is,  PIMCO Total Return (PTTRX)).

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.