For the past couple years, it seemed like emerging markets could do no wrong for investors. But 2012 hasn’t been quite the picnic we’ve all become accustomed to. Growth in the biggest-name driver, China, has slowed, and the rest of the BRICs have faced their own share of difficulties. For the past year, the MSCI Emerging Markets Index is up only 2%, while the S&P has clocked a return of 26%.
Still, when it comes to economic growth, the emerging markets of the world have a lot more near-term potential than the U.S. and other established economies. Goldman Sachs (NYSE:GS) equity analysts Christian Mueller-Glissmann and Peter Oppenheimer, for one, recently said they think the needle’s about to turn away from U.S. equities and back toward emerging markets (and even developed Europe).
Emerging-market mutual funds offer investors the chance to get into broad swaths of international stocks, many of which don’t even trade as ADRs in American markets, and thus are difficult (or at least costlier) for many individual investors to access. They also offer a range of flavors, depending on what parts of the world or what businesses you expect to flare up. Here’s a look at five funds you can rely on to play emerging markets:
Vanguard Emerging Markets Stock Index
The Vanguard Emerging Markets Stock Index (MUTF:VEIEX) tracks the MSCI Emerging Markets Index, which holds more than 900 stocks.
Its largest positions are in China, South Korea and Brazil, with holdings including Chinese telecom China Mobile (NYSE:CHL) and energy firm CNOOC (NYSE:CEO), South Korea’s Samsung and Brazil’s Petroleo Brasileiro (NYSE:PBR).
As VEIEX tracks the MSCI Emerging Markets Index, its returns have been naturally similar, with gains of just 1% in the past year. But its returns also reflect the past successes of emerging markets — with a 10-year annual average of almost 15% — so a broader rebound in emerging markets would be perhaps easiest to catch in VEIEX. Also attractive is the fund’s respectable dividend yield of 2.1%.
Because the fund doesn’t employ active management and merely tracks an index, VEIEX can be yours for a low 0.33% in expenses.
Driehaus Emerging Markets Growth
As mentioned before, a key pull for emerging-market investors is the growth potential, and while the past year has been weak, the long-term still looks promising — especially as industrialization continues and these countries’ populations get wealthier.
One way to capitalize on the trend is the Driehaus Emerging Markets Growth (MUTF:DREGX) fund, which has $843 million in assets. The portfolio managers — Howard Schwab and Chad Cleaver — have extensive backgrounds in emerging markets and a knack for finding under-the-radar companies.
Like VEIEX, the Driehaus fund has heavy weights in Brazil, China and South Korea — top holdings include Samsung, China Mobile and Kia Motors — but the managers also have a wide scope. For example, the fund recently has been buying up companies in the Philippines, which has strong credit expansion and is benefiting from substantial infrastructure investments.
DREGX has struggled in the past year, losing 7%; plus fees of 1.64% are high, and it requires a large minimum investment of $10,000. However, DREGX has fantastic 10-year annual returns of more than 17%, and it boasts a Morningstar 5-star rating.
Fidelity New Markets Income
Bond yields are at rock-bottom levels in the U.S. and Europe. but investors who look for income abroad can find more attractive opportunities.
Case in point: the Fidelity New Markets Income (MUTF:FNMIX), which has a yield near 5%.
FNMIX’s portfolio manager, John Carlson, takes a conservative approach. To this end, he tends to focus on dollar-denominated sovereign bonds, which have a good track record in periods of instability. However, to juice returns, Carlson also will selectively purchase stocks.
Country allocation is heaviest in Venezuela, Mexico and Turkey, though the fund also has an allowance for domestic holdings; the U.S. currently makes up about 9% of the portfolio.
FNMIX is up more than 7% in the past year and has averaged annual returns in the low teens like clockwork for years; it also sports a decent expense ratio of 0.86% and has a 4-star rating.
Matthews China Investor
It has been a rough stretch for the Matthews China Investor (MUTF:MCHFX), which has lost 14% in the past 52 weeks. But the fund has averaged more than 15% returns in the past decade, including more modest single-digit returns the past few years.
MCHFX’s portfolio managers, Richard Gao and Henry Zhang, have a flexible approach to investing. They will invest in Hong Kong operators, state-owned firms and even companies listed on local exchanges. Some top holdings include China Mobile, New Oriental Education & Technology Group (NYSE:EDU) and Lenovo (PINK:LNVGF)
Gao and Zhang have invested in consumer discretionary and consumer staples stocks — which have seen steep drops, but also likely would rally with a broader Chinese economical rebound.
MCHFX charges 1.13% in expenses and also is rated 4 stars by Morningstar.
BlackRock Latin America Investors
While many investors seek growth across the Pacific, Latin America is another potential source of bountiful returns. Pro-capitalist policies continue to be favored, and there’s also the benefits from rich natural resources.
A way to play the region is with the BlackRock Latin America Investors (MUTF:MDLTX) fund. Granted, MDLTX has suffered single-digit losses in the past year, but in the long term, its 22% returns crush the previously mentioned funds.
MDLTX’s portfolio manager, Will Landers, has been investing in Latin America since 1991, though he tends to focus mostly on Brazil, Mexico and Chile. Some of his top holdings include Vale (NYSE:VALE), Petroleo Brasileiro and Grupo Televisa (NYSE:TV).
However, MDLTX is on the pricier side with a 1.55% expense ratio and a 5.25% load charge.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.