A Glimmer of Hope for Emerging-Markets Equity Funds

REKENTHALER REPORT: Sentiment may be starting to turn, suggesting emerging-markets funds could be ones to watch, again

John Rekenthaler 20 June, 2013 | 3:30PM
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In fund investing, popular children are to be shunned. As a general rule, fund categories that enjoy high net cash inflows tend to perform relatively poorly over the next several years, while those that suffer net redemptions usually fare well. This upside-down behaviour is apparent across the globe and among various asset classes. Investor sentiment is a useful indicator of a security's future prospects.

Recent sentiment has not favoured emerging-markets stock funds. As Russ Kinnel, Morningstar's director of mutual fund research, points out, emerging-markets funds have been bucking the usual pattern that weak performance leads to cash outflows. The category roared back from its 2008 losses with a big gain in 2009, but since then it has been treading water and has trailed pretty much all stock and bond categories. Meanwhile, cash keeps flooding in.

Russ has not been surprised, therefore, to see emerging-markets stock funds lag again this year. As he states, yes, stock prices have been getting lower, and cheaper is better than expensive, but as long as fund investors remain fond of the category, it's hard to be too enthusiastic about its prospects.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.

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