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Mutual Fund Commentary

Most emerging markets have something in common - their efforts of structural reforms. They vary in details, but the underlining theme for emerging markets is that most key economies are trying to do away with bureaucratic challenges to economic growth and encouraging entrepreneurship. For example India, a leading growth story among the EM nations, has launched the campaign of 'Make in India'.

India, China, Mexico, South Korea and Indonesia are among the ones working for the structural reforms. Corporate governance, tax reforms, deregulating energy subsidies, and greater access to foreign capital markets are all central theme for these nations. Vietnam incidentally has been overlooked by many. The country is moving to an industrial and manufacturing base from being a commodity exporter. Vietnam was a strong performer in 2014.

However, this is not indicative of a completely rosy picture for all EM nations. There are laggards as well, and challenges that EM countries need to overcome. Russia, Brazil, and the Middle East for example are facing challenges owing to the plunge in oil prices and may continue to suffer.

The flood of cash tipped to return to the United States, thanks to the likely tightening of fiscal policy in the world's largest economy, is at risk of causing severe disruptions across emerging markets. Meanwhile, the US Federal Reserve has already ended its third round of quantitative easing program and may hike rates this year. Capital had flowed into emerging markets when the US was buying trillions of dollars of bonds. However now, tighter fiscal policy may pose a threat to them.

So, investors interested investing in emerging market funds will have to do so prudently. We will pick the 3 top-ranked Emerging Market mutual funds that also have low expense ratios and decent performance record. Before doing so, let’s look at the recent performances of some key emerging market economies.

Recent Performances

The following chart depicts the performances of the ETFs from key emerging market economies 


Source: Seeking Alpha


Looking at the leaders, India, Philippines, Indonesia, Turkey, Thailand, China have all rebounded from losses in 2013. However, it must also be noted that the gains are not as strong for some of them as they were in 2012. A 65.6% gain 2012 for Turkey slumped to negative 27.3% in 2013 and rebounded to 15.8% in 2014.

On the other hand, Russia was the worst performer, slumping 47.2%. It was largely expected as the region has been struggling with sanctions imposed on it following its standoff with the Western countries due to the Ukraine crisis. The Russian ruble too has nosedived, forcing Russia’s central bank to hike the benchmark interest rate from 10.5% to 17% in a surprising and sudden move. (Read: Russia's Trouble with Ruble Continues)

Among the other laggards were Peru, Malaysia, Mexico, South Korea, Chile, Poland and Colombia. However for Chile and Colombia, the losses narrowed from 2013. Meanwhile, Frontier Markets too ended with loss of 11.8%, narrower than 14.6% loss in 2013. Remember, investors prepared to deal volatility and with longer-term investment objective should invest in these markets.

Favorable Valuations

Valuations are said to be more attractive now in the emerging markets as against the current levels in the US. China, Turkey, and interestingly Russia are considered to be top value markets based on balanced view of varied valuation models, according to reports.

The favorable trends in the EM economies are also said to be under recognized. Seeking Alpha notes: “Even after recent rallies in some emerging markets, they continued to appear relatively attractive to us in relation to history, particularly if very low bond yields and interest rates for savers are taken into account.”

3 Diversified Emerging Market Funds to Buy

For investors interested in Emerging Market Bonds funds, we will suggest 2 top ranked funds. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy).
Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds have positive 1-year return, low expense ratios and carry no sales load. The minimum initial expense ratio for the funds is $5000.

Goldman Sachs Emerging Market Debt IR (GSIRX - MF report) seeks high return and capital growth. It invests most of its assets in emerging markets-issued corporate debt securities and other instruments. The non diversified fund may put money on all types of foreign and emerging country fixed income securities.

GSIRX currently has a Zacks Mutual Fund Rank #2 (Buy) and has returned 5.4% over the last one year. The fund carries an expense ratio of 1% as compared to category average of 1.2%.

JPMorgan Emerging Markets Debt R5 (JEMRX - MF report) invests majority of its assets in emerging market debt investments for high total return. It invests mostly in economies or bond markets that are less developed. The fund may invest in junk bonds.

JEMRX currently has a Zacks Mutual Fund Rank #2 (Buy) and has returned 3.6% over the last one year. The fund carries an expense ratio of 0.79% as compared to category average of 1.19%.

Fidelity New Markets Income’s (FNMIX - MF report) primary objective is high current income. The fund invests a lion’s share of its assets in emerging markets or makes other investments that are economically linked to emerging markets. These emerging countries are the ones that have emerging stock market as defined by MSCI. These emerging market countries also may also be the ones with low- to middle-income as classified by the World Bank.

FNMIX currently has a Zacks Mutual Fund Rank #1 (Strong Buy) and has returned 2.8% over the last one year. The fund carries an expense ratio of 0.84% as compared to category average of 1.19%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at www.zacks.com/funds/mutual-funds.
 

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