Fund Commentary with Steve Schoepke

Be Aware when Going Global

For some investors, global funds, which according to Morningstar have at least 25% of their holdings in non-U.S. stocks, offer a comfortable and opportunistic balance. "Comfortable" in that the majority of their holdings are in domestic stocks, while the remainder is exposed to the "opportunistic" possibilities of overseas markets. A particularly attractive aspect of global funds is their ability to not only invest in developed overseas' countries, such as the UK, Japan and continental Europe, but also developing and emerging economies.

It is the developing and emerging economies, which include India, China, Brazil, and others, that often provide global fund performance with their "giddy-up". For example, for the 52 weeks ending with March 2010, the Indian Sensex Index advanced 102%; the Brazilian Bovespa Index was up 119%; and the Turkish ISE Nati 100 Index grew an astonishing 139%. Overall, emerging market as measured by the MSCI Emerging Market Index was up by 80% as compared to the DOW's 36% advance. Unfortunately, investments in developing and emerging markets are also fraught with greater and often less easily detected risks. It is the possibilities of substantial performance rewards and investment risks that increasingly characterize the non-U.S. portion of global funds.

The heighten risk for global funds heavily invests in developing and emerging countries comes from several areas that typically are not present with investments in more developed and mature economies. First, developing and emerging markets both benefit and suffer from being exposed to substantial and sometimes rapid investment flows, often initiated by speculative investors. Such markets tend to attract speculative investment buying, which - "buyer beware" - has a tendency to flow out as quickly as it came in, with predictable adverse affects on performance. The timing these flows is difficult, but they tend to be tactical and contrary to long-term mutual fund investment horizon.

Developed markets have established laws and regulations that dictate ownership rights and markets for trading and valuing investments. Emerging, and to a lesser extent developing markets, do not always have the complete and clear legal and regulatory infrastructures, that investors seek. In addition, such markets are by their nature not fully developed, and as a result the cost of doing business is not yet fully defined.

This raises the question: How should investors accurately value their investments? The answer, and the risk, is they cannot.

So when considering global funds, it is important to understand whether a portfolio is exposed to developing and emerging market stocks, how much, and if these positions are the main drivers of the fund's overall performance. If they are, they could end up being the fund's largest performance accelerator and/or detractor.

Steve A. Schoepke, Director of Research for Financial Research & Analysis Associates, a New York-based investment and mutual fund research firm.

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