5 Top Mutual Funds That Invest in Red-Hot Emerging Markets

Baron Emerging Markets Fund

• Symbol: BEXFX
• Expense ratio: 1.38%, or $138 annually for every $10,000 invested
• Yield: 0.2%
• 1-year return: 22.6%
• 5-year annualized return: 8.8%

The only Kiplinger 25 fund that focuses on emerging-markets companies, Baron Emerging Markets Fund seeks to invest in reasonably priced shares of growing firms. Manager Michael Kass can invest across all developing nations, and in companies of any size, and looks for firms that demonstrate sustainable competitive advantages. The fund’s performance has landed it in the top third of diversified emerging-markets funds in five out of the fund’s six calendar years of existence.

BEXFX has a 31.5% allocation to Chinese stocks, as well as 16.7% exposure to Indian equities. Lately – like many emerging-markets funds – the fund has been riding winning Chinese internet stocks. E-commerce giant Alibaba Group (BABA) is the fund’s largest holding, at 5.3%. The stock has nearly doubled in 2017 as increasing numbers of Chinese consumers spend greater sums online, but also amid successes in other non-core divisions, such as triple-digit year-over-year revenue growth from Alibaba’s cloud computing business.

The fund doesn’t invest only in household names. Another top performer for the fund recently has been TAL Education Group (TAL), a tutoring company that operates 567 learning centers across China and offers online classes.

Kass isn’t looking for a quick pop in positions – the fund’s typical holding period is about four years. He has held TAL shares since 2014, and according to fund commentary, he believes the company could gain market share for years to come.

Matthews Asia Dividend Fund

• Symbol: MAPIX
• Expense ratio: 1.06%
• Yield: 1.6%
• 1-year return: 19%
• 5-year annualized return: 9.6%

For a different spin on emerging markets, consider Matthews Asia Dividend Fund. As its name suggests, the fund focuses on dividend-paying shares of Asian companies. That leads the fund to invest in financially steadier companies than a typical emerging-markets fund might, which in turn means MAPIX can hold up better than peers in slow and even down markets. In 2015, for example, the average fund that invests in Asian companies gained just 1.4%, while the Matthews fund managed a 3.9% gain.

Although you might expect a defensive fund to lag in boom times, that hasn’t been the case this year – the fund’s 27.6% year-to-date return has bested its average peer by 13.1%. That’s particularly impressive given that the fund holds less in technology stocks than its benchmark – the MSCI All Country Asia Pacific Index – and thus has missed out on some of the year’s hottest-performing stocks, such as Alibaba and Tencent Holdings (TCEHY).

Instead, MAPIX holds outsize stakes in consumer staples and consumer discretionary names. The fund’s top holding, Minth Group, at 4.7% of assets, is a Hong Kong-based auto-parts maker whose customers make up 80% of the global auto market. The stock has popped 80% this year.

Matthews Asia Dividend, like BEXFX, has a high concentration in Chinese stocks, at 34.6% of the fund's assets. It also has a 26.6% weight in developed market Japan, and currently allocates 15.8% of its assets to South Korean stocks.

Vanguard Emerging Markets Stock Index Fund

• Symbol: VEIEX
• Expense ratio: 0.32%
• Yield: 2.2%
• 1-year return: 19.1%
• 5-year annualized return: 4.1%

For broad, passive exposure to emerging markets, we like Vanguard Emerging Markets Stock Index, which tracks companies of all sizes across 21 emerging nations. Even compared with other index funds, the Vanguard fund is unusually well-diversified, holding almost 4,700 individual stocks at last report.

In September 2016, the fund completed its switch to tracking a new index, the FTSE Emerging Markets All Cap China A Inclusion Index. What that mouthful means is that the fund now includes small-cap emerging-markets stocks, and also now includes Chinese “A-shares,” which are shares of companies domiciled in mainland China that trade on local Chinese exchanges (historically, foreign investors could only access Chinese equities that traded on the Hong Kong stock exchange).

As a result, VEIEX offers slightly more exposure than it previously did to China, which recently accounted for about 31% of assets. Taiwan makes up 14.9% of the fund, and India accounts for another 11.4%.

The fund’s expense ratio looks like a bargain next to average fees of 1.43% annually for emerging-markets funds. Also, the exchange-traded fund version, Vanguard FTSE Emerging Markets ETF (VWO) – which tracks the same index – charges just 0.14% annually.

Matthews Asia Small Companies Fund

• Symbol: MSMLX
• Expense ratio: 1.47%
• Yield: 0.4%
• 1-year return: 14.3%
• 5-year annualized return: 6.4%

Why another fund on our list from Matthews Asia? The $31.4-billion San Francisco-based fund family is unusual in its focus on investing in Asia – it runs a total of 18 funds that invest in the region. Thanks to that single-minded focus, the investment shop can go a bit deeper in its research than other fund houses might be able to. Its investment pros do more than 2,500 company meetings each year, according to the fund website.

That focus also means the firm’s lineup includes some more narrowly focused funds than a more generalized fund manager might be able to offer, such as the Matthews Asia Small Companies Fund. Although MSMLX's focus on small companies means it has missed out on this year’s pops in China’s household tech names, that focus gives managers the freedom to unearth even faster growth among up-and-coming companies. Two of the fund’s top-performing positions in the third quarter this year were Q Technology, a China-based maker of camera modules for smartphones, and Genscript Biotech, a Chinese company whose gene-synthesis technology is used by researchers around the world. Q Technology’s stock is up 360% year-to-date, and Genscript Biotech shares have surged 152%.

MSMLX is another China-heavy fund at 36.7% of the portfolio, followed by Taiwan (14.4%), India (12.3%) and South Korea (10.6%).

Fidelity New Markets Income Fund

• Symbol: FNMIX
• Expense ratio: 0.86%
• Yield: 4.7%*
• 1-year return: 6.5%
• 5-year annualized return: 4.7%

Emerging markets don’t only deserve a place in your stock portfolio. Fidelity New Markets Income Fund, a member of the Kiplinger 25, invests in emerging-markets debt, with the overwhelming majority of fund assets (some 82%) stashed in government and government-agency debt. Most of those bonds are rated below investment-grade – about two-thirds of fund assets are invested in debts rated BB or lower – hence the fund’s generous yield.

Veteran manager John Carlson generally prefers to avoid making currency bets; dollar-denominated debt accounts for 96.2% of the portfolio. Unlike the stock funds on this list, the Fidelity fund’s holdings skew more toward Latin American holdings, which accounted for 34% of assets at last report, than Asian holdings, which accounted for just 6%.

Carlson’s track record is enviable. The fund has landed in the top third of its category in eight of the past ten calendar years. Its 10.5% annualized return over the past 15 years is better than 88% of peers.

* The yield for this fund represents the SEC yield, which reflects the interest earned after deducting fund expenses for the most recent 30-day period. SEC yield is a standard measure for bond funds.