Value Added


American Launches an Emerging Markets Fund

Steven Goldberg

Talk about contrarian. American, which rarely launches new funds, is stepping into an area that investors can’t run away from fast enough.



The American funds are different. Most fund companies wouldn’t consider unveiling a new emerging-markets stock fund today. Vladimir Putin invades Ukraine, annexes part of it and acts as if he couldn’t care less about sanctions aimed at punishing Russia. A new rumor about economic trouble in China surfaces almost daily. There’s trouble in Brazil, India and Turkey, too. All of this has been too much for investors to bear, and they’ve responding by selling emerging-markets stocks. So far this year, the MSCI Emerging Markets Stock index has sunk 4.5%. Since peaking on May 2, 2011, the index has lost 14.2%.

See Also: Buy Emerging-Markets Bonds

In sum, this would seem to be an inauspicious time to launch an emerging-markets fund. But that’s precisely what Capital Group, the sponsor of the American funds, did on February 3. American Funds Developing World Growth and Income Fund A (DWGAX) hunts for dividend-paying, high-quality companies. Almost all will be based in emerging markets; a handful will be headquartered in developed countries but do most of their business in emerging markets.

When most companies trot out new funds, chances are good that the fund invests in a sector that has been performing well. But American really does go against the grain. The last time the Los Angeles-based firm debuted a fund (it doesn’t happen often) was October 1, 2008, when global stock markets were in freefall. That fund, American Funds International Growth & Income A (IGAAX) has returned an annualized 10.6% since its launch, an average of 3.9 percentage points per year better than its benchmark, the MSCI EAFE index, which tracks developed foreign stock markets. ([All returns are through March 24.)

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From an investing standpoint, the firm’s latest launch may also turn out to be well-timed. “We’ll look back and say, ‘What a great time to launch an emerging-markets fund,’ ” says Shaw Wagener, one of Developing World Growth’s three managers. “Relative to other stocks, emerging markets look quite cheap.”

The long-standing case for emerging markets has been all about growth. Here again, the American funds offering is unusual. It invests solely in dividend-paying stocks, aiming for a portfolio yield of about 3% before expenses in today’s environment. Why? Because over the past ten years, says Wagener, dividend-paying stocks in emerging markets have beaten nonpayers by an average of ten percentage points per year—a staggering gap. In addition, “dividend-paying companies tend to be better managed and better overseen by boards of directors,” he says. “It makes no sense to us to buy any stocks with no dividend yield.”

Not that the fund will focus on high yields. High-yielding companies often lack growth prospects. Wagener calls them “sunset companies.” What’s more, enterprises that are partially state-owned, particularly in Russia, tend to boast high yields. Rather, the managers will look for well-managed companies that can sustain or raise their payouts.

I’m especially enthusiastic about the new fund because American has been investing internationally for years and it has a huge cadre of analysts based overseas. Wagener, 55, has been with the firm 33 years, including a lengthy stint in Singapore. The two other co-managers, Noriko Chen and Chapman Taylor, also worked many years in Asia. All three have spent years researching emerging-markets stocks for investment accounts aimed at institutions. What’s more, the managers can avail themselves of the services of about 30 analysts who spend at least part of their time researching emerging-markets stocks. As is the case at all of American’s stock and bond funds, each of Developing World’s managers has sole responsibility for a slice of the fund’s assets.

The American funds approach is almost entirely bottom-up—that is, the funds focus on picking good stocks rather than forecasting the big picture. That said, Wagener thinks many strategists are much too gloomy on emerging markets. He dismisses the notion that China is facing an economic or financial crisis. And he and his colleagues have even found some promising Russian stocks.

Until now, American Funds New World A (NEWFX) has been the firm’s only emerging-markets play. One of my longtime favorites, the fund is a fascinating hybrid. More than half of its assets are in multinational companies that do a lot of business in developing nations. The rest is in emerging-markets bonds and emerging-markets stocks. The fund’s record is superb.

One big negative to the American funds is that individual investors can’t buy them directly. You have to either go through an investment adviser or buy them through a workplace retirement plan. The class A shares levy a 5.75% sales charge; annual expenses on the new fund are 1.43%. Attractive emerging-markets stock funds available directly to individuals include Harding Loevner Emerging Markets (HLEMX), a member of the Kiplinger 25, and Vanguard Emerging Markets Stock Index (VEIEX).

The American funds were wildly popular with advisers until the 2007-09 bear market, when the performance of the firm’s balanced and bond funds disappointed many investors). Since then, the firm has experienced heavy withdrawals. I think the redemptions have been overdone. The records of the firm’s foreign stock funds, in particular, are outstanding. I think the fund will be a winner, too.

Steve Goldberg is an investment adviser in the Washington, D.C., area.



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