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Your Guide to Emerging Markets Morningstar Research | Bill Rocco

opportunities all over the developing world as well as the leeway to tread lightly in or even avoid unat- tractive regions and markets, while their geographi- cally focused rivals do not have either capability. And though some strong options—including Oppen- heimer Developing Markets ODMAX and Virtus Emerging Markets Opportunities HEMZX —are now closed, investors seeking a diversified emerging- markets fund still have several good options in the Morningstar 500 . American Funds New World NEWFX is a great choice for those seeking a cautious route to the developing world. In addition to buying emerging- markets stocks, it invests around 10% of its assets in emerging-markets bonds and 30% of its assets in the stocks of developed-markets firms that reap sizable portions of their revenues in the developing world. Because of its bonds and developed-markets equities, it has held up far better than most of its peers in sell- offs and been the least volatile member of its cate- gory over time. It also has an excellent management team and a modest expense ratio going for it. And though it can really lag in rallies, it has solid long- term returns. (From its June 1999 inception through June 14 , 2013 , it has posted an 8 . 8% annualized gain versus a 9 . 0% annualized return for its typical peer.) provides broad emerging-markets exposure at a dirt- cheap price. Largely because of its big expense edge, it has earned solid long-term returns. (Through June 14 , it has outpaced its average rival by 24 basis points annualized over 10 years, by 57 basis points annual- ized over 15 years, and by 64 basis points annualized since its 1994 inception.) It tends to suffer as much as its typical peer in sell-offs, though, as it favors larger- market and larger-cap names, which rarely escape such periods unscathed. And it’s worth noting that it is transitioning to a new target index, the FTSE Emerging Markets Index, which excludes South Korea. T. Rowe Price Emerging Markets Stock PRMSX has merit as a more adventurous emerging-markets vehicle. It’s attractively priced. Gonzalo Pangaro and Mark Edwards, who took the helm in April 2009 but Fans of passive investing should check out Vanguard Emerging Markets Stock Index VEMAX . It

Emerging markets are a valuable diversifier and a way to tap into some of the faster-growing and lower- debt economies. Yet, there’s no consensus on how much emerging-markets exposure investors should have in their portfolios. By market value, about 20% of foreign markets are classified as emerging, so somewhere in that ballpark makes sense for many investors. Look Before You Leap The first step for investors who want to meet that allocation to emerging-markets stocks is to ascertain how much exposure they are getting to such stocks through their existing funds. Most foreign large-cap funds devote around 10% of their assets to such stocks, but there are dozens that invest close to or even more than 20% of their assets in such issues. American Funds EuroPacific Growth AEPGX currently has a 24% position in the developing world, while Janus Overseas JAOSX currently has a 40% weighting there. Foreign small/mid-cap funds invest a bit more in emerging-markets stocks than their large-cap counter- parts, and there are a good number of smaller-cap international-stock funds that provide lots of exposure to such stocks, including Artisan International Small Cap ARTJX (which has a 26% stake at present) and Columbia Acorn International ACINX (which has a 31% stake at present). And though most world- stock and domestic-equity funds don’t normally in- vest a lot in the developing world, American Funds SMALLCAP World SMCWX , Wasatch Ultra Growth WAMCX , and some others do. Broader Is Better Investors who decide they need more emerging- markets exposure than they already have are best served by diversified emerging-markets funds. Such funds have the freedom to pursue superior