Emerging markets gain new stature

They're baaack!

Emerging-market funds - those often scary investment products that made many days seem like Halloween in the 1990s - are once again wracking up substantial gains.

Or, at the least, posting smaller losses than other international fund categories the first part of this year.

Economic growth in many emerging-market nations is heading back up to rates of 5 percent or more, following the economic malaise of the late 1990s. Many such nations, including Thailand, Brazil, South Korea, and India have thriving - if somewhat turbulent - economies.

For citizens of those nations, that means more disposable income to purchase long-needed consumer goods.

For now at least, the world economy appears to be on target for continued growth. So "a solid, diversified emerging-market fund can make sense for aggressive investors with a long time horizon," says Bill Rocco, senior analyst with Chicago-based information firm Morningstar Inc.

For a fund sector that was often considered a pariah just a few years ago, the numbers are impressive.

Emerging-market funds rose sharply in 1999, according to Morningstar. Diversified emerging-market funds (that invest in multiple countries and regions), shot up 72 percent last year, compared with a more modest 27 percent rise for the Morgan Stanley EAFE Index, the main international-stock index.

Latin American funds, meanwhile, jumped up 61 percent; Asia, excluding Japan, was up 72 percent.

This year, according to Morningstar, diversified emerging-market funds are off. But they are down a miniscule 0.96 percent through January, compared to a dip of over 6 percent for the Morgan Stanley EAFE Index. And in the first days of February, many of the funds are in positive territory and rising.

Another way of noting the group's pizzazz this year is to compare them to all major equity groups. According to a study of 10 major fund categories by Rockville, Md.-based information firm Wiesenberger, emerging-market performance came in the best through Jan. 31. While all 10 categories finished in negative territory, emerging markets registered the smallest loss, down 1.4 percent, compared, for example, to 3.7 percent for US growth stocks, 5 percent for the S&P 500 index, and 4 percent for global equity.

"It's been a flat market this year, but that makes the solid performance of the emerging-market funds all the more interesting," Mr. Rocco says.

So is it time to invest in an emerging-market fund? Quite possibly, if you can stand roller-coaster rides, according to Walter Updegrave, author of "The Right Way To Invest In Mutual funds" (Time- Warner books).

Mr. Updegrave believes an average investor should not commit more than 5 to 10 percent of his or her portfolio to these funds. The safest route, he argues, is to go into a diversified emerging-market fund. The riskiest course: selecting a fund that invests in just one nation, or a regional economy, such as East Asia, or the Indian subcontinent.

Rocco makes the same argument. But conservative investors can also get third-world exposure by looking for global or international funds that have a 20 to 30 percent exposure to emerging markets. Templeton and Dreyfus, for example, add in such countries on several of their larger global funds, Rocco notes.

Fund expert Brian Trumbore, editor of a Web site on investing and news (stocksandnews.com), argues that you can get just as good returns from third-world growth by investing in US or European multinational companies, and thus avoid the anguish that often accompanies emerging-market funds. Even returns from short-term US government bond funds - in the 5 to 6 percent range - would have equaled emerging-market-fund returns in much of the 1990s, but without the volatility of the funds, he maintains.

If you do decide to buy into an emerging-market fund, "use dollar-cost averaging," Rocco says. That means investing roughly the same amount each month, or each quarter, for a lengthy period of time, such as a year. The reason: Averaging evens out ups and down in share prices. Price volatility is one of the main characteristics of this fund category.

The best to emerge this year

Fund Name YTD 1-yr. 3-yr.*

Lexington Worldwide Emrg Mkts 16.42% 153.54% 12.18%

800-526-0056

Pioneer Emerging Mkts A 15.19 126.22 13.75

800-225-6292

Driehaus Emrg Mkts Growth 12.96 138.92 N/A

800-560-6111

Oppenheimer Dvlp Mkts A 12.15 112.95 18.36

800-525-7048

Dresdner RCM Emrg Mkts N 10.64 N/A N/A

800-726-7240

Guardian Baillie Emrg Mkts A 10.42 93.26 N/A

800-221-3253

*Annualized N/A - Not available newer fund

Source: Morningstar Inc. (as of 2/8 close)

(c) Copyright 2000. The Christian Science Publishing Society