3 Best Diversified Emerging Market Funds - Best of Funds


Fund tracking firm EPFR Global reported inflow of $4.2 billion into the emerging-market equity and bond funds for the week ending April 2. That is in sharp contrast to how the year began, as previous data quoted $40 billion worth of fund outflow from emerging market equity funds in the first quarter. The outflow of funds had in fact more than doubled from first quarter of 2013. However, there seem to be a reversal now as the emerging market equities witnessed the first fund inflow in 22 weeks.

Also, iShares MSCI Emerging Markets Index ETF (EEM) is showing strength now. This ETF tracking index had dropped 1.9% from the beginning of the year till Mar 31. Since Apr 1, the MSCI Emerging Markets Index has moved up 2.3%.

Emerging Nations

Looking at some of the emerging nations, iShares MSCI Brazil Index ETF (EWZ) has jumped 5.4% so far this month as compared to a tad 0.8% increase from the beginning of the year till Mar 31. Mexico has also shown promise and Egyptian stocks have rallied strongly over the last one year. Indonesia's significant trade surpluses strengthened its currency and boosted growth. India's deficit shortfall estimate is half of what the nation saw last year at $88 billion. India has also boosted its borrowing costs.
Russia has also shown improvement with its currency and benchmark rebounding from the lows hit owing to the Crimean crisis.

Factors Affecting Emerging Economies

The reference to Russia brings us to the factors that were affecting the emerging markets this year. The Federal Reserve's tapering of the bond repurchase plan, the Russia-Ukraine crisis and dismal Chinese economic data are the key cases in point.

Fed Taper
The original $85 billion asset-repurchase plan of the US Federal Reserve now stands at $55 billion. This is the result of the central bank's decision to chop $10 billion from the third quantitative easing plan every month.

The International Monetary Fund had warned in January that trimming the stimulus plan could be a potential threat of more adversities for emerging economies. IMF managing director Christine Lagarde had called it to be "a new risk on the horizon and it needs to be closely watched".

Most emerging nations have depended on cash inflow as the source of financing their growth. The Fed taper meant foreign investors pulling money out of these economies. The currencies were to go weaker and it did happen.

On top of respective political issues in the emerging economies, the Fed taper was an added headwind. At the beginning of this year, emerging market currencies suffered their worst sell-off in five years. Argentina's peso had its worst fall since 2002. A threat to the stability of the government in Turkey dragged its currency to record lows. Separately, Hryvnia, Ukraine's currency, dropped to a four-year low. South Africa's rand saw itself weakening beyond 11 per dollar for the first time since 2008.
However, some currencies showed strength later. Indonesian Rupiah, Indian Rupee, Mexican Peso and Turkish Lira are now up 8.5%, 3.0%, 0.03% and 2.5% year to date, respectively. South Africa's Rand has offset the loss to just 0.07%. Brazil's Real hit a five-month high earlier this week.

Russian Ruble and Ukrainian Hryvnia are nonetheless down 8.1% and 30.3%, respectively, year to date.

Much of the decline in Russian and Ukrainian currency can be attributed to the Crimean crisis. Tension escalated since mid Feb as Russia intensified its bid to make Crimea, a southern region of Ukraine, a part of its own. The vote on Mar 16 in Crimea turned to be overwhelmingly in favor of citizens from this region wanting to be part of Russia. Soon after, Russia annexed Crimean peninsula. (Read: Russia Mutual Funds to Watch on Ukraine Crisis ).

The crisis at its peak had dragged Russia's MICEX down by 12% over a month (mid Feb to late March). Russia's Ruble had at a point slumped 10%. Russia's central bank had to step in and it hiked interest rates to 7% from 5.5%.
The Ruble is now up 2% in April and MICEX is trading in the green so far this month.

China Data 
Chinese economic data have been mostly dismal since the beginning of 2014.The initial or "flash" Markit/HSBC Purchasing Managers' Index fell to an eight month low of 48.1 in March from 48.5 in February, indicating a possible decline in China's manufacturing activity for the third straight month.

Separately, reports of larger-than-expected decline in Chinese exports had raised concerns of a slowdown in the world's second-largest economy. The anxiety further intensified after the Chinese government reported lower-than-expected yearly increases in industrial production, fixed asset investment and retail sales of 8.6%, 17.9% and 11.8%, short of analysts' expectations of a rise by 9.5%, 19.4% and 13.5%, respectively.

Earlier this month, China's State Council has promised of new measures to match the annual growth estimate. There were announcement of plans to increase spending on railways, low-income housing and tax relief for small businesses. (Read: 3 Top China Mutual Funds to Consider )

Emerging Market Funds to Buy

The troubles seem to be making less impact on the markets now with the currencies are gaining strength and the funds witnessing inflows. So, it is an ideal time for investors to add some diversified emerging market mutual funds. It is not always easy for individual investors to decide on which mutual funds to buy. Diversified emerging market funds may invest their assets in at least 20 emerging or developing nations.

Let us zero-in on funds that sport a Zacks Mutual Fund Rank #1 (Strong Buy) . Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Russell Emerging Markets Fund Class A (REMAX) invests a lion's share of its assets and borrowings in emerging market firms. It mostly invests in companies that are economically related to emerging market nations and in depositary receipts. The securities are non US dollar denominated and are held outside the domestic land.

The top holdings include Samsung Electronics Co Ltd (based in South Korea), OAO Lukoil ADR (Russia), Taiwan Semiconductor Manufacturing Co Ltd (Taiwan) and Baidu, Inc. ADR (China).

The fund has a positive year to date return of 0.45%. Over the past month it has returned 4.2%.

Wells Fargo Advantage Emerging Markets Equity Fund Class A (EMGAX) invests majority of its assets in equity securities of emerging market firms. Companies that are listed, operating, domiciled or get most of their revenues from emerging market countries as explained by the MSCI Emerging Markets Index are considered for investment purposes.

The top holdings include Samsung Electronics, Taiwan Semiconductor Manufacturing, China Mobile Ltd (Hong Kong) and Bank Bradesco ADR (Brazil).

The fund has a negative year to date return of 0.76%. Over the past month it has returned 4.3%.

Oppenheimer Developing Markets A (ODMAX) invests in developing or emerging markets across the globe. It may invest all of its assets in foreign issuers. The majority of its assets and borrowings are invested in companies whose activities are based in developing countries or are economically connected to these markets. The fund invests in a minimum of three developing economies.

The top holdings include Baidu, Tencent Holdings Ltd. (China), OAO Novatek GDR (Russia), Infosys Ltd (India).

The fund has a negative year to date return of 1.58%. Over the past month it has returned 3.1%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Mutual Funds

Referenced Stocks: EEM , EWZ , REMAX , EMGAX , ODMAX



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