3 Hot Emerging-Markets Funds That Might Cool Off

Diversified emerging-markets funds had a solid rather than an exceptional year in 2023. While the MSCI World Index—which focuses on the United States and other developed markets—gained 23.8% last year, the MSCI Emerging Markets Index returned 9.8%. Thus, it’s not surprising that the average diversified emerging-markets fund returned 12.4% in 2023 versus 18.2% for the typical global large-stock blend fund (and 22.4% for the average large-blend fund).

However, a number of prominent diversified emerging-markets funds gained 20% or more last year, including Artisan Developing World ARTYX, Cullen Emerging Markets High Dividend CEMDX, and Lazard Emerging Markets Equity LZOEX. All three have Morningstar Medalist Ratings of Bronze and are solid emerging-markets vehicles for the long haul, but it’s crucial to understand that they come with real risks as well as ample upside potential.

Artisan Developing World

Manager Lewis Kaufman focuses on 30 to 50 names and regularly allows his stock selection to result in big sector and country overweightings—including hefty stakes in the U.S.—as he pursues high-quality firms with good business models and other strengths. These traits really paid off in 2023 as top-10 names Airbnb ABNB, Nvidia NVDA, and CrowdStrike CRWD and several other U.S. holdings soared, and this fund gained 29.5%. But the bold aspects of Kaufman’s approach backfired and led to oversize losses in both 2021 and 2022. This fund lost 41.4% in the latter year, which was roughly twice as much as its average peer and the MSCI Emerging Markets Index. Kaufman is talented and earned great results over his first 5.5 years at the helm, so this fund has posted superior returns over five years and since its 2015 inception, albeit with lots of volatility along the way.

Cullen Emerging Markets High Dividend

This fund’s team focuses on cheap, high-yielding stocks with solid fundamentals. These biases paid off in 2023 as value and high-dividend stocks outperformed in the developing world—plus the team’s stock selection was helpful—and this fund gained 26.1% last year. Its biases often paid off in selloffs in the past, while the team has regularly executed well, so its long-term record is good. That said, emerging-markets value and high-dividend stocks also outperformed in 2021 and 2022, so this fund has benefited from a strong multiyear tailwind. Its limited exposure to growth stocks will normally be burdensome when such names lead the way in the developing world, as was the case most recently in 2020 when the fund lagged far behind its average peer and the MSCI Emerging Markets Index.

Lazard Emerging Markets Equity

This fund returned 22.0% in 2023 and earned superior results over the trailing three years through December. It benefited from manager James Donald’s picks in Asia and, like Cullen Emerging Markets High Dividend, from the outperformance of value stocks in the developing world over both periods. Indeed, Donald pursues firms with above-average returns on equity selling at below-average prices, and this fund often has much more exposure to value stocks than its average peer and the MSCI Emerging Markets Index. Donald is skilled and well-supported, and this fund has earned good results over his 22-year tenure. But his relative value process has often been out of favor during the past decade and comes with real risks. This fund has posted mediocre returns over the trailing 10- and 15-year periods, and it has been more volatile than its typical rival and the index over both spans.

This article first appeared in the December 2023 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.