From the March 2006 issue of Investment Advisor • Subscribe!

March 1, 2006

World of Plenty

Investors who put money into emerging markets equities have been rewarded handsomely in recent years. Rich in commodities with an abundance of cheap labor, the emerging economies have received mountains of cash from U.S. investors grown tired of tepid returns in their own markets. What's more, emerging markets equities are likely to keep outperforming, given that they are still trading at discounts to stocks in the developed world. However, some of that discount can be attributed to the high risk and volatility that are part and parcel of investing in the emerging markets.

One of the top performers in this arena, the $916-million Acadian Emerging Markets Portfolio (AEMGX) is well diversified by sector. At year-end 2005, the fund's exposure to the energy, finance, technology, telecommunications and materials industries varied between 14% and 17%. However, there is a heavy focus on East Asia in the portfolio--more than 57% of assets are parked in South Korea, Taiwan, and China. Despite the fund's superb performance, the portfolio's

average trailing P/E ratio remains a modest 9.2. The Acadian fund has been closed to new investors since August 2004.

Another strong performer, the $7.3-billion Oppenheimer Developing Markets Fund (ODMAX), seeks to identify trends in the emerging world, like the development of the middle class and new technologies, that are likely to fuel long-term growth. Manager Mark Madden seeks stocks offering above-average earnings growth, high return on invested capital, effective research and product development, and pricing flexibility.

The fund's top country allocations are currently Korea (20.8%), India (14.6%) and Brazil (14.4%). Top individual holdings include Korean-based DRAM-maker, Hynix Semiconductor Inc., Brazilian oil giant Petroleo Brasileiro, and Indian software services company Tata Consultancy Services Ltd. Madden doesn't trade much--the fund's turnover rate was only 28% in calendar 2005.

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