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M*: Smaller-Cap Emerging-Markets Funds: Fad or Good Idea?
I think investors should consider these as a way to participate in the potentially enormous growth in EM economies. But care should be given to the process of selecting the most appropriate fund. For most folks, a fund that is diversified geographically most likely offers the best risk/reward profile. By that, I mean something like a small cap China fund probably carries a lot more risk than a fund that owns stocks from 20 countries around the world. On the other hand, companies like Matthews have made a living by concentrating in specific Asian economies. We would suggest something like Wasatch Emerging Markets Small Cap WAEMX. Not only does it own EM small caps, but it gets into the real Frontier Markets to some degree. While possibly more volatile, the rewards of such undiscovered markets/companies could raise the risk/reward profile. We use this fund as one of several international holdings in our moderate to aggressive accounts, but limit the total allocation because of its potential volatility.
Diversification of the overall portfolio is definitely a goal, but I have been moving away from diversified funds. My gut feeling is that emerging markets are very quirky and complex. I have been working and living in an "emerging market country" for a few years now and I still do not understand the stock market here at all, especially the small cap stocks. Large EM companies like Samsung and China Mobile seem more similar to their counterparts in US/developed countries and often have some kind of government support, so I think they are easier for fund managers to evaluate and understand. But the small cap market is completely mystifying to me.
I now have more appreciation for a company like Matthews that has invested heavily in a specific region and seems to genuinely understand it (and almost certainly more so than the local pundits). I own Matthews Asia Small Companies MSMLX which I think is now closed, but it was attractive because it was a bit of a compromise between having some diversification but still enough focus to make informed judgments. I can't deny that WAEMX performance has been very good, but I just don't know how much that is due to actual skill.
Comments
I now have more appreciation for a company like Matthews that has invested heavily in a specific region and seems to genuinely understand it (and almost certainly more so than the local pundits). I own Matthews Asia Small Companies MSMLX which I think is now closed, but it was attractive because it was a bit of a compromise between having some diversification but still enough focus to make informed judgments. I can't deny that WAEMX performance has been very good, but I just don't know how much that is due to actual skill.