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Fund Watch

Have Emerging Markets Hit Bottom Yet?

China's market collapse has pulled down the two Kip 25 funds that focus on emerging markets.

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What had been a rough few years for emerging markets has turned into a full-fledged bear market. Since late April, the MSCI Emerging Markets index has sunk 25%. As a result, the index is now in negative territory for the past five years, with an annualized loss of 2.3%.

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The biggest culprit is China, which accounts for one-fourth of the index. Though it soared early in the year, the MSCI China index has plunged 33% since late April. The collapse accelerated in mid August, when the government devalued the yuan, fueling concerns that China’s economy is in much worse shape than the authorities are letting on.

Looking beyond China, many experts say emerging-markets stocks have yet to hit bottom. Although they are now better priced, says Alejo Czerwonko, a strategist for UBS, “there’s still a lot of uncertainty in the emerging world.”

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How have the two Kiplinger 25 funds that focus on emerging markets fared? On an absolute basis, poorly; on a relative basis, just fine. Harding Loevner Emerging Markets (HLEMX), a stock fund, fell 23.7% over the past year, losing 3.3 percentage points less than the Emerging Markets index. “We’re in the downside of the cycle,” says Rusty Johnson, one of the fund’s comanagers. He sees bright spots in some countries, such as India, Mexico and Poland, that have low debt and structural reforms under way.

Emerging-markets bond funds have also had a tough time. Although Fidelity New Markets Income (FNMIX) dropped 5.0% over the past year, that was 6.6 percentage points less than the amount lost by the typical emerging-markets bond fund. The fund’s focus on dollar-denominated debt helped avoid currency losses associated with the strong dollar. New Markets yields 5.6%.

With each passing year of dismal results, it becomes harder to argue for placing some of your money in emerging markets. But the case for investing in them remains the same as it always has: Economies of developing nations are growing at twice the rate of developed economies. Plus, many emerging nations are much stronger than they were during previous financial crises, says Omar Aguilar, chief investment officer of stocks at Charles Schwab Investment Management.

That being the case—and because it’s better to buy low—we are keeping Fidelity and Harding Loevner in the Kip 25.

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