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Uneven Rally in Diversified Emerging Markets Category

Gregg Wolper

Gregg Wolper: Morningstar's Diversified Emerging Markets category, which includes emerging-markets stock funds, has been on a real roller coaster the past few years. It was struggling from 2013 through 2015, especially in 2015 when energy prices collapsed and Brazil, one of the larger emerging markets, was hit by political turmoil, corruption cases as well as the energy problem. In 2016 though, the category bounced back, partly because of Brazil's improved condition. Even though it was not getting that much better, perception was there, and energy prices bounced back.

The rally has continued this year. In 2017, Diversified Emerging Markets is one of the better-performing stock categories. But what's interesting is that the rally has not been evenly spread out. China and India are doing well, also Korea and Mexico. But some markets are lagging such as Brazil, which is not keeping up this year as there has been a return of political problems, and also, Russia is not doing well, South Africa, too. So, funds that are overweight in those countries can be some of the ones that are lagging and not taking full advantage of the rally.

And an example is Lazard Emerging Markets Equity Fund, which is overweight in Brazil and in Russia and even like South Africa. Another one is Invesco Developing Markets, which prefers some of the smaller markets in Asia such as Indonesia and Thailand. Sometimes that's really helped them, but this year those markets are not keeping up.

So, when you're trying to find out why a certain fund is doing well or underperforming this year in the emerging-markets group, take a look at country performance and their country weightings because sometimes that can provide some indications that individual stock holdings or sector weightings don't show.