Turnaround Funds in Emerging Markets

10/27/2015 10:00 am EST

Focus: FUNDS

George Putnam

Editor, The Turnaround Letter

Sure, things look bleak for many emerging markets right now, as many of these economies are heavily dependent on natural resources, observes George Putnam, editor of The Turnaround Letter.

At the same time, China, which has been a major export market for many EM countries, appears to be having problems of its own. 

But if you look longer-term—both backwards and forwards—emerging markets look like much more promising investments. 

Looking in the rear-view mirror, since it was launched in early 2003, the MSCI Emerging Market ETF (MSCI) has gained 172% (including the recent swoon) versus a 96% gain for the S&P 500 (SPX). 

Looking forward, most emerging market countries appear to have much greater growth potential than the developed countries.

Emerging market stocks are likely to be more volatile than large-cap stocks in developed markets, but over time you should get compensated for that volatility with higher returns. 

Right now the valuations on many emerging market stocks are approaching historically low levels.  And many of the stocks have decent dividend yields to compensate you in case you have to wait a while for a rebound.

There are a number of different investment vehicles for investing in emerging markets. 

Index Funds

The iShares Emerging Markets Index ETF (EEM) tracks the MSCI Emerging Markets Index, which covers markets in 23 emerging countries.  It is a very large and very liquid ETF with some $23 billion in assets. 

The Vanguard Emerging Markets Index (VWO), which is available in both open-end and ETF versions, is designed to track the performance of the FTSE Emerging Markets Index.

Actively Managed Funds

The JPMorgan Emerging Markets Equity Fund (JFAMX) is an open-end fund that seeks to better the performance of the MSCI Emerging Markets Index.  They rely on country specialists in an investment process that prioritizes stock picking over country weighting. 

The Morgan Stanley Emerging Markets (MSF) is a closed-end fund that invests at least 65% of its total assets in emerging markets securities.  The stock trades at a 12.3% discount to net-asset value. 

The Templeton Emerging Markets Fund (EMF) is another closed-end fund where the managers use a bottoms-up approach to stock selection.

The fund seeks undervalued opportunities but with an eye kept on the political environment. Templeton Emerging trades at a 12.1% discount to net asset value.

Regional Funds

Among ETFs are the iShares Asia 50 (AIA) and the iShares Latin America 40 (ILF) that invest in the largest (50 and 40, respectively) stocks in their regions. 

The SPDR S&P Emerging Asia Pacific (GMF) and the SPDR S&P Emerging Europe (GUR) also both look interesting. 

We also like an open-end fund called T. Rowe Price Latin America Fund (PRLAX) as well as an open-end fund named T. Rowe Price New Asia Fund (PRASX) that invests across Asia, excluding Japan. 

The Templeton Dragon Fund (TDF) is a closed-end fund with a 10.9% discount that also invests in Asia, excluding Japan.

Single Country Funds

Most of the single country funds are closed-end. We think that India Fund (IFN), Mexico Fund (MXF), and Turkish Investment Fund (TKF) look like markets with particularly good potential now.

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