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6 Safer Emerging-Market Favorites

06/23/2011 3:00 pm EST

Focus: FUNDS

Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

For investors who want to join the long-term emerging market rally but are afraid of the market's current volatility, Jim Lowell of Fidelity Investor shares six top plays in the sector and an easy strategy to reduce your risk on them, in this exclusive interview with

Jim, stocks have been doing really well in the United States. Stocks have been doing well in emerging markets as well.

They've been doing spectacularly well. So much so that many people are asking do they have any more room to run? My answer is yes, absolutely so.

If you're casting out three, five, ten, 15, 20, 30 years, emerging markets are where you're going to get your double-digit returns. That could be to the plus or the minus side, however.

I wouldn't be surprised if we do see a weak second or third quarter here in the US—to see that negativity sort of, just the momentum of it, spill over into some fire-sale prices in the emerging-market realm.

But emerging markets are growing, they're growing well, and dimensionally they're growing across regions in a way that we simply haven't seen since, I would argue, the early '50s and '60s here in the United States.

So when you're talking about growth in the emerging markets, where are you looking? Are you looking at Asia and Latin America?

I am looking at Latin America and Asia, and I am looking in particular at places like Brazil inside of Latin America. I want economies that are well diversified and fully established, with political systems that are deep and intact, not just crude-dependent countries in Latin America, for example.

Is Brazil still considered an emerging market?

It is still listed inside of the emerging-market indices, but it is clearly a global player both in terms of the depth, breadth, and diversification of its economy, and also specifically the stability of its political backdrop.

So for an investor that's watching who wants to go and invest in emerging markets, what would you recommend to them? They don't have too many different options. Do they want to focus on Asia?

I like Asia. I think China may be a little bit overblown at the moment.

Here's what I like most about consumers in the emerging markets. They have more dollars, based upon working more hours, to be able to purchase more goods and services.

So you can buy a good, diversified US healthcare fund or a good, diversified US consumer-staples fund. Fidelity has two of them. Those let you, with literally half the risk of the emerging markets, invest in what's being consumed in the emerging markets.

But directly the emerging markets? I like emerging-market bonds. John Carlson of Fidelity New Markets Income (FNMIX) has had a well diversified emerging-market bond fund since 1995. He's been running that fund well.

If you are going to have explosive growth, you need to finance it. The only way to do it is through debt.

How about if you're looking at Latin America? Can you give us a couple of picks?

Fidelity Latin America (FLATX) is a wonderful, broadly diversified, and actively managed play in the area.

I also think commodities are the story in the emerging markets. So I like the PowerShares DB Agriculture Fund (DBA). It's a basket of soft commodities—wheat, cocoa, sugar, cattle, cattle feed.

Again, emerging markets are demanding more goods and services than they themselves can produce, so you want to own both the commodities that they're demanding...also probably the machinery and the manufacturing behind them—the sewing, the tending, the harvesting, and then the transporting of those commodities to those countries.

You know, I think for a lot of investors they know that they want to go into these regions, but figuring out where they want to focus can be the tough part.

It's hard. Many just opt for the Vanguard MSCI Emerging Market ETF (VWO), or the iShares Emerging Market ETF (EEM).

Those are certainly good, and they're certainly the plain-vanilla play on the equity side, but I want to stay long in emerging markets. I think you're going to see, on the equity side, some extraordinary volatility in the near term.

So I like the pairing strategy. If I own Vanguard, the VWO, I would own either the iShares Emerging Markets Bond ETF (EMB), or I would own Fidelity New Markets Income in a pairing strategy equally. So basically cut the volatility in half, but be able to stay long on the growth story that's going to be here I think for a very long while.

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