After years of outperforming the U.S. market, emerging markets, as measured by the MSCI Emerging Markets index, topped out last October, and have been moving downward in fits and starts since then.
"International markets have recently been under pressure from tighter lending standards, large collateralized debt obligation-driven bank writedowns, record commodity prices, and fears of slowing exports to the United States," says Alec Young, international equity strategist at Standard & Poor's.
In its asset allocation portfolios, S&P recommends an emerging-markets allocation of 6% for aggressive investors, 3% for moderate investors, and no exposure for conservative investors.
For managers of emerging-markets mutual funds who must, by mandate, invest in such areas, taking steps to protect against the downturn means moving the portfolio out of aggressive sectors and into more defensive sectors, and also varying which emerging markets are emphasized.
Hot BRICs
Take, for example, the Templeton BRIC fund (TABRX), launched in June, 2006 to take advantage of investor awareness of the BRIC economies: Brazil, Russia, India, and China. Templeton's star emerging-markets fund manager, Mark Mobius, with 30 years of emerging-markets experience, is in charge of the fund.
BRIC economies' share of global gross domestic product (GDP) has grown rapidly since 2000 and now accounts for more than 9% of global GDP, according to the World Bank.
Yet even within the BRIC subset of emerging markets, some economies are expected to perform better than others. It appears that Mobius believes China's growth engine will continue to roar, while Russia's starts to sputter. At the end of 2007, the fund had 33.4% of its assets in China, up from 21.3% a year earlier. By contrast, it had only 18.7% of its assets in Russia, down from 27.9% a year earlier. Similarly, Mobius cut back on the fund's allocation to banks, which stood at 9.9% as of the end of 2007, down from 12.4% a year earlier.
American Century's Patricia Ribeiro, lead manager for the American Century Emerging Markets fund (TWMIX), doesn't look at top-down factors such as each country's relative economic growth outlook as closely as some other emerging-market fund managers. She chooses to identify stocks in emerging markets that have growth characteristics she likes, including ever-higher rates of earnings growth.
Still, in the end, the top holding in the American Century fund, Petroleo Brasileiro (PBR), is the very same top holding in the Templeton BRIC fund.