Emerging-Markets Medalists in a Topsy-Turvy Climate

Diversified emerging-markets funds have faced exceptionally varied conditions in the past couple of years. Most of the world’s emerging markets posted sizable losses in the first half of 2013 due to worries about their currencies and various other local issues as well as concerns about the global economy. Several markets, such as China and India, bounced back sharply in the second half of the year as local conditions improved and finished 2013 with modest gains or only limited losses. But many others, such as Brazil and Turkey, were sluggish or continued to struggle in the second half of the year and ended 2013 with double-digit declines. Altogether, the MSCI Emerging Markets Index lost 2.6% in 2013, even though Taiwan, Malaysia, and most frontier markets posted nice gains.

Widespread divergence continued in the first quarter of 2014. The Russian exchange lost 14.5% because of worries about the crisis in the Crimea, whereas the India exchange gained 8.2% on optimism about the new government. Most developing markets have performed fairly well since then, though, thanks to a plethora of positive local developments as well as greater confidence in the global economy. Through July 30, the MSCI Emerging Markets Index has returned 9.5% so far this year. 

No Consistent Laggards Or Leaders
Even the best funds in the diversified emerging-markets category have been challenged by this tumultuous climate. Granted, none of the 20 diversified emerging-markets medalists finished in their category’s bottom quartile in both 2013 and during the first seven months of 2014. But not one of those 20 funds managed to earned top-quartile returns in both periods, either, though Silver-rated  Harding Loevner Emerging Markets (HLEMX) and Bronze-rated  Delaware Emerging Markets (DEMAX) came close to doing so.

Harding Loevner Emerging Markets beat 81% of its peers in 2013, buoyed by its quality bias, its exposure to the relatively strong Taiwanese and Nigerian markets, and its managers’ excellent stock selection in China. And it outpaced 70% of its rivals for the year to date though July 30, as its Taiwanese holdings continued to thrive and its Indian and Brazilian picks rebounded nicely. Delaware Emerging Markets fared better than 95% of its rivals last year, as its managers made more than their share of good picks in China, South Korea, and elsewhere. The fund surpassed 72% of its rivals in the first seven months of this year, thanks to a sizable weighting in the strong Brazilian market and its managers’ stock selection there and in other markets.

The First Shall Be Last
Meanwhile, two diversified emerging-markets medalists that thrived in 2013’s rather stormy conditions have struggled in 2014’s generally favorable climate. Gold-rated  American Funds New World (NEWFX) is one of the few offerings in the category that invests sizable amounts in developed-markets firms with ample business in the developing world as well as in traditional emerging-markets names. It benefited handsomely from its hefty exposure to U.S., European, and Japanese stocks like  Google (GOOG) and SoftBank last year, when it gained 10% and outpaced 90% of its rivals. But several of its European and Japanese holdings languished during the first seven months of this year--SoftBank lost 18%--and it returned less than 87% of its peers.

The story is similar at Bronze-rated  Thornburg Developing World (THDAX). It, too, invests a significant amount of assets in developed-markets firms with major economic ties to the developing world, and thanks in large part to big gains from U.S. holdings like  Facebook (FB) and  Qualcomm (QCOM), it returned 16% and beat 94% of the category  in 2013. However, some of the fund’s developed-markets holdings suffered losses in 2014, as did some stocks in Russia and China, and it landed in the category’s bottom quartile for the year to date through July 30.

And the Last Shall Be First
Finally, a handful of diversified emerging-markets medalists that posted bottom-quartile losses last year have earned top-quartile gains this year. Silver-rated  Aberdeen Emerging Markets (ABEMX) has mounted one of the biggest comebacks. It lost 7.5% and trailed 93% of its rivals in 2013 because its managers, who readily allow their quality-oriented and value-driven stock selection to lead to distinctive country weightings, had built oversized stakes in Brazil, Turkey, and some of the other hardest-hit markets. But several of those markets have fared especially well in 2014, and the managers’ stock selection has been good overall, so the fund beat 83% of its counterparts for the year to date though July 30.

Silver-rated  Virtus Emerging Markets Opportunities (HEMZX) has also rebounded sharply in 2014. Manager Rajiv Jain, who follows a growth-oriented strategy that combines bottom-up analysis with macro factors, has always been wary of firms based in China because of the level of government intrusion there, while finding far more companies to his liking in India than most rivals. Those geographic biases really stung in 2013, causing the fund to lose 6% and lag 88% of its rivals. However, the fund's Indian stocks have rebounded strongly this year, and along with big gains from many other holdings, that has propelled it to topnotch returns in the first seven months of 2014.