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M*: Whatever Happened To Emerging-Markets Stock Funds?

FYI: In the early 1990s, emerging-markets stock funds were the rage. Their subsequent results have been weaker than even the skeptics believed.

The appeal was obvious. Higher risk, according to conventional theory, meant higher returns--and there was no doubt that emerging markets carried higher risk. They also offered excellent growth prospects. The Asian Miracle was a catchphrase. South Korea, to name one example, had increased its per-capita gross domestic product from $158 (expressed in current terms) in 1960 to $6,516 in 1990. From behind Zambia to ahead of Turkey!


  • Controversial? "Everybody" says EM should be part of a well-diversified portfolio. Abundant food for thought here. I'm intrigued because part of me sees what he sees and is in agreement.
  • edited April 2019
    Whatever Happened To Emerging-Markets Stock Funds?

    1) Investors today don’t have the necessary long term perspective and patience to invest in stuff like this. Either hold just a little (5-10%) or satisfy yourself with a good global / international stock fund that invests a small sum in EM.

    2) The prediction of outsized growth for EM equities dates back at least to global fund pioneer John Templeton. When asked why he thought EM stocks would outperform longer term, Sir John usually replied: “Because they have so much farther to rise“ (than already developed economies). Makes sense I guess. Certainly fit the humble and charming man’s ever optimistic outlook.

    3) EM stocks will have their day. Everything eventually does. Whether they’ll outperform more developed markets longer term is subject to debate. Expenses can eat you alive. And geo-political considerations loom large.

    4) Note that the term is non-specific. EM can include virtually any underdeveloped market from Peru (Latin America) to Korea and China (Southeast Asia). Feel like throwing darts?
  • Also the diversification analysis from the article is not that useful. For all the swift large declines as far as I go back (back to the 1987 crash), everything goes down sharply together (no diversification advantage). However in the subsequent recovery there were big differences in different asset performance. In this case for all 2-3 year periods that include 2008, EM stocks largely outperformed USA stocks (probably largely because China hugely stimulated their economy, while the US was frozen on fiscal policy and Europe raised interest rates before eventually lowering them), and this really helped even steady my own portfolio performance. People need to look at diversification in a more modern context. For sharp quick increases and decreases all stock classes are highly correlated and will have large movements together. But for the next several years following this diversification smooths out returns and lead to less variation in recovery.
  • @Mitch- You make several interesting points, especially regarding the propensity for just about everything to sink together in a major downturn, but not to recover in unison.
  • edited April 2019
    @Mitch - Makes very good sense. Thank you.

    May I suggest that placing a comma after “following“ might avoid possible confusion as to meaning?

    “For sharp quick increases and decreases all stock classes are highly correlated and will have large movements together. But for the next several years following, this diversification smooths out returns and lead to less variation in recovery.”

    (Another approach might be to place the comma instead after “diversification” - depending where you want the emphasis.)
  • edited May 2019
    Now ... you folks know I'm not a grammar expert or great wordsmith. However ... I'm thinking ... that the comma needs to go after the word this. And, would read as follows: "But for the next several years following this, diversification smooths out returns and leads to less variation in recovery."

    Regardless ... Mitch conveys a great message.

    Currently, Old_Skeet owns two emerging market funds. They are NEWFX and DWGAX. I've owned NEWFX for better than ten years and just recently purchased DWGAX within the past year. I plan on keeping both of them as permanent positions for diversification purposes.
  • edited May 2019
    Thanks @Old_Skeet for the comment.

    I think the problem we’ve both identified is that it’s hard to tell whether following is intended to serve as (1) a verb or (2) a participial (a type of modifier derived from a verb).

    If #1 is the case, than the action (“following”) could conceivably happen sometime after the EM and domestic U.S. markets had already sustained the initial damage. Perhaps the investor possesses excellent timing and only bought EM stocks after the initial damage had occurred in order to to take full advantage of the anticipated divergence.

    However, if #2 is the case, than “following” might serve as an adjective / modifier (part of the participial phrase: “following this diversification.”) The phrase serves to identify specifically which years are being spoken of. In this case the diversification likely occurred before the markets sustained the initial damage and (since it remained in place after the damage) served to smooth out future returns. In either case the investor experienced less volatility than had he / she been only invested in developed markets. However, it seems likely he / she would have come out farther ahead in the first instance.

    Minor technical point: If we assume #2 to be the case, than the main verb in the sentence changes and becomes “smooths (out”). And in that case, the sentence technically needs a new subject (which it appears to lack). However, the intended subject is “it”, and it’s quite common in standard usage nowadays to omit the pronoun in this case, as the intended reference to the concept of diversification is easily inferred by the reader.

    Ol’Skeet is correct that there are several different places a comma might be inserted. The key thing here is to note that whether the comma is placed after years or after diversification makes a significant difference in how the reader interprets the sentence’s meaning.

    * I’ve linked this story before, but it’s worth repeating: The Case of the 10 Million Dollar Comma:
  • @Hank: Were you an English teacher ? Have a nice day !
    P.S. TE HE
  • edited May 2019
    @Derf - Understanding how sentence structure affects meaning has many useful applications other than being an English teacher. Do you not suppose more than a few have needlessly compromised their financial well-being by signing-off on mortgage documents or other financial disclosures they didn’t fully comprehend?
  • @ hank; Check this headline.
    M*: 5 Steps To A Refreshed, Rebalanced Portfolio
    Recently posted here.
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