The American funds are different. Most fund companies wouldn't
consider unveiling a new emerging-markets stock fund today.
Vladimir Putin invades Ukraine, annexes part of it and acts as if
he couldn't care less about sanctions aimed at punishing Russia. A
new rumor about economic trouble in China surfaces almost daily.
There's trouble in Brazil, India and Turkey, too. All of this has
been too much for investors to bear, and they've responding by
selling emerging-markets stocks. So far this year, the MSCI
Emerging Markets Stock index has sunk 4.5%. Since peaking on May 2,
2011, the index has lost 14.2%.
In sum, this would seem to be an inauspicious time to launch an
emerging-markets fund. But that's precisely what Capital Group, the
sponsor of the American funds, did on February 3. American Funds
Developing World Growth and Income Fund A (
) hunts for dividend-paying, high-quality companies. Almost all
will be based in emerging markets; a handful will be headquartered
in developed countries but do most of their business in emerging
When most companies trot out new funds, chances are good that
the fund invests in a sector that has been performing well. But
American really does go against the grain. The last time the Los
Angeles-based firm debuted a fund (it doesn't happen often) was
October 1, 2008, when global stock markets were in freefall. That
fund, American Funds International Growth & Income A (
) has returned an annualized 10.6% since its launch, an average of
3.9 percentage points per year better than its benchmark, the MSCI
EAFE index, which tracks developed foreign stock markets. ([All
returns are through March 24.)
From an investing standpoint, the firm's latest launch may also
turn out to be well-timed. "We'll look back and say, 'What a great
time to launch an emerging-markets fund,' " says Shaw Wagener, one
of Developing World Growth's three managers. "Relative to other
stocks, emerging markets look quite cheap."
The long-standing case for emerging markets has been all about
growth. Here again, the American funds offering is unusual. It
invests solely in dividend-paying stocks, aiming for a portfolio
yield of about 3% before expenses in today's environment. Why?
Because over the past ten years, says Wagener, dividend-paying
stocks in emerging markets have beaten nonpayers by an average of
ten percentage points per year--a staggering gap. In addition,
"dividend-paying companies tend to be better managed and better
overseen by boards of directors," he says. "It makes no sense to us
to buy any stocks with no dividend yield."
Not that the fund will focus on high yields. High-yielding
companies often lack growth prospects. Wagener calls them "sunset
companies." What's more, enterprises that are partially
state-owned, particularly in Russia, tend to boast high yields.
Rather, the managers will look for well-managed companies that can
sustain or raise their payouts.
I'm especially enthusiastic about the new fund because American
has been investing internationally for years and it has a huge
cadre of analysts based overseas. Wagener, 55, has been with the
firm 33 years, including a lengthy stint in Singapore. The two
other co-managers, Noriko Chen and Chapman Taylor, also worked many
years in Asia. All three have spent years researching
emerging-markets stocks for investment accounts aimed at
institutions. What's more, the managers can avail themselves of the
services of about 30 analysts who spend at least part of their time
researching emerging-markets stocks. As is the case at all of
American's stock and bond funds, each of Developing World's
managers has sole responsibility for a slice of the fund's
The American funds approach is almost entirely bottom-up--that
is, the funds focus on picking good stocks rather than forecasting
the big picture. That said, Wagener thinks many strategists are
much too gloomy on emerging markets. He dismisses the notion that
China is facing an economic or financial crisis. And he and his
colleagues have even found some promising Russian stocks.
Until now, American Funds New World A (
) has been the firm's only emerging-markets play. One of my
longtime favorites, the fund is a fascinating hybrid. More than
half of its assets are in multinational companies that do a lot of
business in developing nations. The rest is in emerging-markets
bonds and emerging-markets stocks. The fund's record is superb.
One big negative to the American funds is that individual
investors can't buy them directly. You have to either go through an
investment adviser or buy them through a workplace retirement plan.
The class A shares levy a 5.75% sales charge; annual expenses on
the new fund are 1.43%. Attractive emerging-markets stock funds
available directly to individuals include Harding Loevner Emerging
a member of the Kiplinger 25
, and Vanguard Emerging Markets Stock Index (
when the performance of the firm's balanced and
bond funds disappointed many investors[/Link]). Since then, the
firm has experienced heavy withdrawals. I think the redemptions
have been overdone. The records of the firm's foreign stock funds,
in particular, are outstanding. I think the fund will be a winner,
Steve Goldberg[/Link] is an investment adviser in
the Washington, D.C., area.