CFRA Research Looks to Emerging Markets Funds

12/23/2019 5:00 am EST

Focus: FUNDS

Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

Asian Pacific stocks are trading at a P/E discount to their 10-year historical average, which CFRA views as justified given the weaker economic data and sentiment toward the region, notes analyst Todd Rosenbluth in CFRA Research's The Outlook.

Indeed, China’s economy grew 6% in the third quarter of 2019, the slowest quarterly growth rate since 1992, as the trade war took its toll. The trade truce, should it lead to a broader improvement in trade conditions, is a positive catalyst, but its sustainability remains up for debate.

As investors prep their portfolios for 2020, many are likely to consider actively-managed mutual funds for the emerging markets portion of their portfolios, since active managers can quickly react to news flow.

In rating equity mutual funds, CFRA combines holdings-level analysis with fund attributes tied to its risk-adjusted performance and costs.

Using our screening capabilities, we highlight two emerging market funds that rate favorably for positive risk considerations due to their holdings, a below-average level of standard deviation and an above-average Sharpe ratio.

A Sharpe ratio quantifies the return of an investment strategy in excess of the risk-free rate relative to its volatility. A higher Sharpe ratio, combined with a lower standard deviation, indicates a strategy is producing strong returns relative to the risk that is being incurred.

American Funds New World Fund (NEWFX) generated a three-year Sharpe ratio of 0.81, significantly higher than the 0.43 peer average, aided by an 18% lower standard deviation.

NEWFX provides emerging market access in a differentiated way as the fund holds approximately 50% of assets in companies domiciled in emerging Asia, Europe, Latin America and the Middle East, with the remainder in multinational companies from developed markets with material emerging markets exposure.

The fund’s expense ratio of 1.0% is below the 1.4% peer average. The fund gets high marks from CFRA concerning manager tenure: the team managing the fund has been in place since 1999 and is thus well versed in the ups and downs of investing in emerging markets.

Driehaus Emerging Markets Growth Fund (DREGX) is a more traditional emerging markets equity fund, with limited exposure to developed markets, and a multi-cap growth approach. The fund’s three-year Sharpe ratio of 0.66 is aided by a 7% lower standard deviation.

DREGX’s 1.4% expense ratio is in line with peers. While lower risk, emerging market funds may seem like an oxymoron, these mutual funds have generated strong risk-adjusted records and are positioned favorably for 2020, according to CFRA.

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