Emerging markets funds paying off for investors
LOS ANGELES - Investors have been betting heavily on emerging markets stocks this year, and the strategy appears to be paying off.
The MSCI Emerging Markets Investment Market Index, which covers securities across developing nations, is up nearly 16% this year, according to FactSet. Compare that with the Standard & Poor’s 500 index, which is up 7.2%.
Fund investors are piling in. Through the first four months of this year, net flows into emerging market U.S. funds totaled $26.17 billion, according to Morningstar. That’s an increase of more than 20% from the net flows that went into emerging markets funds in all of 2016.
David Semple, portfolio manager for the VanEck Emerging Markets Fund (GBFAX), points to a couple of reasons why: Better-than-expected earnings from companies in developing nations and the prospect of higher short-term interest rates, which traditionally has been a precursor to better growth.
His fund focuses on companies in the developing world with potential for growth at a reasonable price, which often means small-cap stocks. It is up 22.5% this year, according to FactSet.
Semple spoke with the AP about where emerging market stocks are headed. Answers have been edited for length and clarity.
Q. Is this a good time to get into emerging market funds?
A.
“Rather than say this is necessarily a good time, I’ll run through four different things people should be looking at. The first is the dollar. A strongly appreciating dollar is not good for emerging markets. It sucks liquidity out of emerging markets. It reduces earnings, and there’s a translation effect of what emerging market companies can achieve and how that’s translated back to developed market based investors.
“The second is rates. The short end of the curve moving up in the U.S. is not something to be feared. Traditionally it’s tied to better growth prospects.
“The third element is, broadly speaking, politics. We’re talking about big structural changes that come as part of the disenfranchisement of lower skilled workers in developed markets in favor of emerging market consumers and middle class, who have seen their incomes go up. But if you see protectionism and trade tariffs actually happening, then that would tend to be a negative for emerging markets. So as the administration’s agenda has moved perhaps away from that, then that’s positive for emerging markets.
“The most important: In the last four or five years, emerging markets companies have disappointed in terms of earnings. That has changed over the last year, where emerging markets companies, on the whole, have produced better earnings than expectations and have certainly lived up to those expectations.”
Q. How do you go about selecting companies for the fund?
A.
“It focuses on companies with structural growth at a reasonable price. By that we mean visible and persistent growth, which means we steer away from some of the more cyclical elements of emerging markets, like energy or materials. We have to identify those companies that have that structural growth and then have a strong discipline about not paying too much for them.”
Q. What sets one emerging market fund apart from another?
A.
“We would argue strongly that at this juncture what is going to happen or where the success will be in emerging markets looks very different from what the index constituents will tell you to invest in now. So you have to look for a manager that is being active. And it means basically not being beholden to this historic construct of what emerging markets used to be. Because we’re changing.”