An otherwise good year for equities hasn't been so rosy for emerging-markets stocks. Led by fears of slowing economic growth in China, but also dragged down by lacklustre returns in India and Latin America, emerging-markets equity funds have been among the few equity losers of 2013. As of July 29, the diversified emerging-markets equity category had lost 6% year to date. Meanwhile, China-region funds had dropped 2%, with the India and Latin America equity-fund categories each losing about 15%.
Despite a rough first half of 2013, diversified emerging-markets equity funds were up about 5% during the 12-month period leading up to July 29—nothing to write home about, but not horrible. But with the S&P 500 up 24% during that time, emerging-markets stock funds—which tend to be more volatile than their developed-markets counterparts—look like laggards by comparison.
It's the continuation of a story that's been going on for a few years now, with the category modestly outperforming the index in 2010 and 2012 but experiencing steep losses in 2011, producing a three-year annualised return of a measly 1.2%. (Morningstar's John Rekenthaler noted in a recent column that despite the lacklustre performance of emerging-markets stocks, investors have poured $140 billion into traditional mutual funds and ETFs investing in them during the past three years.)
Of course, emerging-markets stocks are unlikely to underperform forever. In fact, GMO's recently released seven-year market forecast sees emerging-markets stocks as the top-performing asset class during that time frame, with 7% annualised returns after inflation compared with negative 1.2% for US large-cap stocks and 3% for international large caps.
Whatever one's personal feelings are about how emerging-markets will perform in the coming years, their recent poor performance—and the strong returns of developed-markets equities—means that some investors may now find their portfolios have become underweight in emerging markets, making this as good a time as any to rebalance.
As a benchmark, consider that the Vanguard Total World Stock Index ETF (VT), which tracks most of the world's publicly traded stocks, allocates 9.5% of its portfolio to emerging markets.
Those looking to add emerging-markets equity exposure, or just looking for a better fund than the one they already own, have several quality offerings from which to choose.
Screening Morningstar’s database for emerging market equity funds with Analyst Ratings of Gold, meaning they have been vetted by our experts and are expected to outperform their peer groups on a risk-adjusted basis over the long term, returns a list of six funds available for sale in the UK. Of the six, four are already soft-closed—Aberdeen Global Emerging Markets, Aberdeen Emerging Markets, First State Global Emerging Markets Leaders and First State Global Emerging Markets.
Existing investors can add to their holdings, but there is usually a charge of 2% to do so.
Here is more detail on the two open to new investment:
Comgest Growth Emerging Markets
Morningstar’s 
Thomas Lancereau notes that the fund remains firmly established in the top quartile of its category over five and 10 years to the end of July 2012, and he is confident that this outperformance can be maintained over the long term.
Skagen Kon-Tiki
Skagen’s Kon-Tiki fund comes in a range of currency denominations, including GBP. Morningstar’s Thomas Furuseth says that despite fees on the high side, this fund has served investors extremely well, delivering an annualised return of 19.07% in EUR terms since launch in February 2011.
Run your own search for funds with Morningstar's free Fund Screener tool.
Holly Cook co-authored this article.
