After a down year in 2018, emerging market mutual funds have bounced back handsomely to start 2019 amid optimism that risk taking will be rewarded with a more patient U.S. Federal Reserve and that trade tensions will ease, explains Todd Rosenbluth, an analyst with CFRA Research's The Outlook.
However, past performance is not necessarily indicative of future results — a premise CFRA’s mutual fund ratings approach was built on — and we think investors looking to participate in potentially further gains need to go beyond a solely rearview mirror approach.
Our five-star rated emerging markets funds tend to have strong performance records, low costs and appealing holdings.
Year-to-date through April 18, the average emerging markets equity mutual fund rose 14.0%, nearly erasing the 16.4% decline achieved in 2018. However, some of CFRA’s top-rated actively managed mutual funds in the Lipper peer group climbed even higher.
Artisan Developing World Fund (ARTYX) generated an impressive 24% total return to start the year, after losing just 15.7% in 2018. Though the fund only launched in mid-2015, it has already established a strong risk-adjusted track record. As of March 2019, the fund’s three-year Sharpe ratio of 0.97 was well above the 0.64 peer average.
The fund invests in companies that management thinks have the capital structure and business model to realize their domestic demand potential. From a holdings perspective, CFRA independently thinks the fund incurs only modest risk with many of its recent top-10 holdings earning above-average S&P Global Market Intelligence Quality Rankings.
China (34% of assets), India (12%) and Brazil (10%) are the largest emerging market country exposures for this fund, which charges an in-line with mutual fund peers 1.4% expense ratio.
Meanwhile, JPMorgan Emerging Markets Equity Fund (JFAMX) rose 20.9% year-to-date through April 18. Similar to Artisan Developing World, JPMorgan Emerging Markets narrowly outperformed its peer average in 2018 with a 16.2% decline.
This share class has a 17-year track record and in the last ten years has been in the top half of its peer group with regularity. Although its standard deviation is elevated, the fund’s three-year Sharpe ratio of 0.90 was above the peer average.
Further helping CFRA’s five-star rating is a modestly lower 1.2% net expense ratio. Management aims to identify high-quality businesses that compound earnings sustainably over the long term and CFRA’s research indicates this to be occurring. China (31% of assets), India (17%) and Hong Kong (7%) are the largest country exposures.
