But the table below describes the reality most investors have experienced. Emerging-market funds, whether narrowly focused on a region, such as T. Rowe Price New Asia and Merrill Lynch Latin America B, or more broadly diversified, such as Templeton Developing Markets I, haven’t touched returns in the United States, much less repaid investors for their heart-stopping volatility. ““There hasn’t been enough oomph to make up for the ouch,’’ says Bill Rocco of Morningstar.
Is it finally time to trash the theory? Not yet. There are two problems with acting on this sorry-looking record. First, five years isn’t nearly long enough to judge an investment category. More important, returns during these particular five years in the United States have been grotesquely abnormal. If you substitute 11 percent, the historical rate of return for stocks, for Vanguard’s 20.9 percent, emerging-market funds suddenly shine. Or consider a completely different time frame. For the decade ending in 1994, the Standard & Poor’s 500 Index advanced an average 14.4 percent per year. Hong Kong smartly outpaced the United States, returning 26.5 percent. It could happen again. ““We can expect recovery in Hong Kong in one or two years,’’ says Mark Mobius, fund manager of Templeton Developing Markets.
Still, emerging markets are hardly a no-brainer investment. Here’s how to navigate the dangers and opportunities in the Asian Contagion:
When to sell: If ever there was an investment category designed for a buy-and-hold strategy, it’s emerging markets. Why? Extreme volatility means that timing purchases and sales is exquisitely difficult. If you’d bought Mexican equities when they were devalued in 1994 and sold them at the end of September of this year, you’d have no return to show for it. If you’d bought them only 60 days later, you’d have an average annual return of 27.5 percent, according to Morgan Stanley Capital International. Who could pull that off? Still, the Southeast Asian blowoff may have proved to you that you don’t belong in these markets, a perfectly intelligent conclusion for many people. You’ll probably have to wait six to 18 months before seeing the markets hit pre-crash levels. If you must exit now, sell on one of the market’s upward bounces as it zigzags down over the next few months.
When to buy: Opportunists don’t try to pick the trough of a crash. It’s like catching a falling knife. You have two choices. Wade in a bit at a time, and be ready to lose money while the market bottoms out. Or wait a year or two, understanding that you’ll miss some of the upswing. Mobius is already buying in Thailand, where he says intense debate about fix-ing the country’s problems has begun.
What to buy: ““My Latin American experience taught me to swear off Latin American funds, and this experience tells me to swear off Southeast Asia funds,’’ says Sheldon Jacobs, editor of the No-Load Investor in Irvington, N.Y. Stick with a diversified emerging-market fund, such as Templeton Developing Markets I, Montgomery Emerging Markets R or Pioneer Emerging Markets A, rather than single-country or regional funds. They may swoon during a crisis. But diversified holdings will allow them to snap back much faster than a Pacific Rim fund–and grant you some peace of mind. Sweating the details of every market explosion isn’t what will make you money–especially in times like these.
13-WEEK 5-YEAR AVERAGE FUND RETURN ANNUAL RETURN Vanguard Index S&P 500 +1.9% +20.9% T. Rowe Asia -34.1 +1.9 Merrill Lynch Latin America -1.3 +13.9 Templeton Developing Markets -3.3 +16.9 SOURCE: MORNINGSTAR
