5 Top Emerging-Markets Funds

Consensus is a rare gem in the investing world. But you can catch a glimpse of it shining from at least one area today: emerging markets.

Top fund managers are resolute that developing countries offer the best growth prospects among major stock categories over many years. But because of the group's strong run so far in 2009, you shouldn't expect further gains over the next year or so. Your best approach is to start dollar-cost averaging now. That means adding the same amount to a fund every month or quarter, whether the category slumps or takes off on another tear.

Our favorite in the group is Kiplinger 25 member T. Rowe Price Emerging Markets Stock. This fund (symbol PRMSX) is already up 49.2% year-to-date through July 20, trouncing the average emerging-markets fund by nearly four percentage points. But there are plenty of other solid choices. Here are four additional fine funds, each of which charges less in annual expenses than the typical emerging-markets fund.

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The managers of Harding Loevner Emerging Markets (HLEMX) look for stories of high quality and growth. Rusty Johnson, Simon Hallett and Craig Shaw home in on consistent revenue and profit growth among companies with little or no debt and plenty of cash flow. "One problem for emerging-markets companies is that when the going gets tough, the financing gets going," Hallett explains. Abundant cash flow helps companies deal with tight credit. It also gives companies the ability to pounce on new opportunities as they arise, he says.

An example of an ideal company for the fund, Hallett says, is Wal-Mart de Mexico, known as Walmex -- a stock Harding Loevner has owned on and off in other funds since the mid 1990s. When Wal-Mart acquired a majority stake in a Mexican retail company called Cifra in 1997, the U.S. giant dispatched a team from its Arkansas headquarters to induct Cifra leaders into the Wal-Mart style of management. "After six months they came back to Arkansas and said 'They can do it better than we can,' " says Hallett.

Walmex is one of the fund's top 25 holdings today. Hallett says the company's main competitors are independent shops which, granted, may have more character than a Wal-Mart but don't have a chance at selling well-known brands at a competitive price. The fund has returned 15.1% annualized since its 1998 inception, beating the MSCI Emerging Markets index by two percentage points per year on average. It is up 35.4% year-to-date through July 20.

At Lazard Emerging Markets (LZEMX), lead manager James Donald likes to buy stocks trading at a 30% discount to his price targets. And every company he and the co-managers consider adding to the portfolio is scored for its exposure to certain major risks associated with emerging markets, such as macroeconomic instability and corporate governance. That makes the fund fundamentally different from Harding Loevner, and a good complement.

This caution doesn't mean Lazard is lemon-proof. It had a big stake in Satyam Computer Services, an Indian company, when an accounting-fraud scandal surfaced in January. But the conservative bent of the fund's other picks more than compensated for that disaster. So far in 2009, the fund is up 38.4%, which trails the average emerging-markets fund by about six percentage points. More important, over the past ten years the fund has gained 11.2% annualized. That places it among the top quarter in the group.

Computers handle the stock selection at Acadian Emerging Markets (AEMGX). This fund's quantitative strategy factors in a broad range of data, from earnings growth to the stock's relative value to data on a given stock's price movement. The idea is to isolate growing companies trading for reasonable prices. Once Acadian's models work their magic, management buys or pares stocks in proportions relative to the fund's benchmark index, Standard & Poor's IFC emerging-markets index. This method results in a well-rounded portfolio that has a bit more oomph than a pure index fund. Over the past ten years Acadian has gained 12.9% annualized. That beats more than 90% of emerging-markets funds. In 2009, it is up 44.3% year-to-date.

Matthews Pacific Tiger (MAPTX), which has all of Asia (excluding Japan) as its oyster, shouldn't be your only emerging-markets fund. But managers Sharat Shroff and Richard Gao are talented enough at stock picking to make a case for this fund anyway. Gao and Shroff run a concentrated portfolio of about 60 stocks, but they are so confident in their choices that in 2008 they turned over less than one-fifth of the fund's holdings.

"I would never claim to know the 5,000 to 6,000 companies in Asia like the back of my hand," Shroff says. So instead of trying, he and Gao build their knowledge in pockets-learning everything first about the companies they're interested in, and then expanding their understanding into related industries and competitors, where they often end up finding even better stock ideas than they started with. "We try to understand the ecosystem that companies operate in," Shroff says.

Rising household income is the dominant theme, tilting the fund toward consumer stocks and insurance and financial services, and away from commodities and materials. The fund has gained 11.1% annualized over the past ten years and is up 47.4% year-to-date.