Growth Still in Emerging Markets?
Fund manager Chris Alderson thinks so. Brisk economic growth, plus better corporate management, could keep the run-up going.
Stocks in emerging markets are by nature volatile and they’ve just come off four straight blow-out years. Does that mean you should avoid them? If you’re a long-term investor, the answer is no. In fact, the case for investing in companies of developing countries may be growing. Many of these economies are booming, valuations are still lower than in the U.S. and economic and fiscal management by local governments has improved over the years.
T. Rowe Price Emerging Markets Stock (symbol PRMSX) has returned 12% annualized over the past decade through March 31. It has beaten the average diversified emerging markets fund by an average of more than two percentage points per year over that period. Chris Alderson, the London-based lead manager of the fund from its inception in 1995, says there are several keys to sustaining performance in these volatile markets.
Alderson and his team of three other managers and a dozen analysts look for steady growth companies but avoid overpaying for that growth. He keeps portfolio turnover low—50% a year, less than half the average in emerging markets funds—which saves money since commissions and transaction costs tend to be steep in developing countries.
Alderson addresses risk by purchasing stocks after sell-offs and maintaining a well-diversified portfolio of 130-140 shares. He currently likes Russian retailers and media companies, Brazilian and Mexican banks and Indian infrastructure plays. One favorite stock is Taiwan Semiconductor Manufacturing, the global leader in the outsourcing of chip-making.
Alderson is very much a sober bottom-up stock-picker in the T. Rowe Price mold. Years ago, he says, most emerging market fund managers used a top-down approach, but now that economies have stabilized and are giving birth to outstanding companies, a bottom-up tack works fine. Moreover, corporate governance and managements are improving in the developing world.
So, after a huge run-up these past four years, how does Alderson view emerging-market stocks' asset class? Not surprisingly, he still believes they will generate superior long-term gains because of population growth in developing lands and healthy economic growth. He figures earnings will expand 20% this year, so on average these markets could rise 20% as well. Alderson suggests that investors allocate 20% of their international-stock portfolios to emerging markets; so if you’re putting 25% of your savings in foreign stocks, he’s saying to invest 5% in developing markets.
T. Rowe Price Emerging Markets, incidentally, sports an annual expense ratio of 1.25%. That’s about one-third less than the category average.