Emerging-markets stocks have had a rough decade. Over the trailing 10 years through October 2023, the MSCI Emerging Markets Index posted a 2.1% annualized return, falling well behind the S&P 500′s 11.9%. But in the decade prior, emerging-markets stocks outpaced U.S. stocks by more than 5 percentage points annually. Such is the cyclical nature of global capital markets, where entire asset classes can come into and fall out of favor.
Emerging-markets stocks have gained 11.7% in the past year, but they’re still 46% lower than peaks reached back in February 2021. Here’s a look at some of our top diversified emerging-markets fund picks.
GQG Partners Emerging Markets Equity GQGPX earned a Morningstar Medalist Rating of Silver when we initiated coverage in May 2019 and was upgraded to Gold in May 2023. Since its most recent rating, the fund has outpaced its peers handily. While this year’s showing has largely been driven by dramatic runups in top holdings like ITC ITC and Nvidia NVDA, its enviable longer-term record stems from outperformance in most down markets. However, the strategy did not display its typical resilience in 2022′s downturn. Although lead manager Rajiv Jain’s decisive move into energy stocks proved helpful, holdings in Russia and China anchored the fund’s 20.9% loss, the same decline as the Morningstar Category average and slightly worse than the index. Under Jain, the fund’s unconventional and often bold approach topped 86% of peers since we initiated coverage through October 2023.
American Funds New World NEWFX, a longtime favorite, was rated Gold in November 2011 and taken down one notch to Silver in January 2021 when we started giving separate ratings for each share class. From December 2011 until October 2023, its 5.8% annualized return easily beat the 2.4% achieved by the average diversified emerging-markets peer. It isn’t a pure emerging-markets play, though. Companies with at least a fifth of their revenues or assets attributable to the developing world are eligible, provided at least 35% of the strategy’s assets are invested directly in emerging-markets-domiciled securities. This differentiated approach has helped the fund outperform peers with less volatility, offering investors a smoother ride. And though this strategy has undergone leadership changes, it remains in capable hands.
Dodge & Cox Emerging Markets Stock DODEX received an inaugural Medalist Rating of Bronze in April 2023. From May 2023 through October, the fund’s 1.0% return outpaced the average peer. And since its May 2021 launch, the fund has performed relatively well despite double-digit declines in emerging-markets stocks generally. Its 8.9% loss since inception through October 2023 was less severe than the MSCI Emerging Markets Index’s 12.1% drop. Unlike other well-regarded Dodge & Cox strategies whose processes rely entirely on its analysts’ fundamental research, this fund utilizes a quantitative screen based on factors that its analysts typically consider, such as valuation, business and management quality, and growth potential. However, the strategy still benefits from its analysts’ research. In fact, there is considerable overlap between this fund’s holdings and Gold-rated Dodge & Cox International Stock DODFX, which has had an emerging-markets stocks sleeve for years.
Vanguard Emerging Markets Stock Index VEMAX has carried a Bronze rating for a decade. Over the past 10 years through October 2023, the fund’s 2.1% annualized return narrowly beat the peer average. The fund tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which holds large-, mid-, and small-cap stocks from more than 20 emerging markets—effectively capturing the entire emerging-markets equity universe. Its diversification has helped the fund weather market downturns better than peers. In 2022, the fund’s 17.8% decline was 3 percentage points better than the average peer. Its market-cap-weighted approach tilts the fund toward Chinese stocks, which made up 31% of the portfolio as of September 2023 compared with 26% for its average peer.
This article previously appeared in the November 2023 issue of Morningstar FundInvestor. For a free sample copy, click here.
