After years of outperforming the U.S. market, emerging markets, as measured by the SCI Emerging Markets index, topped out last October, moving downward in fits and starts since then.
"International markets have recently been under pressure from tighter lending standards, large collateralized debt obligation-driven bank write downs, record commodity prices, and fears of slowing exports to the United States," says Alec Young, international equity strategist for Standard & Poor's.
For managers of emerging markets mutual funds, who must, by mandate, invest in such markets, taking steps to protect against the downturn means moving out of aggressive sectors and into more defensive sectors, and also rejiggering which emerging markets are emphasized.
Take, for example, the Templeton BRIC fund, which was launched in June 2006 to take advantage of investor awareness of the "BRIC" economies: those in Brazil, Russia, India, and China. Templeton's star emerging market fund manager, 30-year veteran Mark Mobius, is in charge of the new fund.
Yet even within the BRIC subset of emerging markets, some economies are expected to perform better than others. Mobius must believe China's growth engine will continue to roar, while Russia's starts to sputter. As of the end of 2007, the fund had 33.4% of its assets in China, up from 21.3% a year earlier and only 18.7% of its assets in Russia (27.9% a year earlier). Similarly, Mobius cut back on the fund's allocation to banks (9.9% as of the end of 2007, down from 12.4% a year earlier).
American Century's Patricia Ribeiro, lead manager for the fund, doesn't look at top-down factors like each country's relative economic growth outlook as closely as some other emerging market fund managers. Hers is a very bottom-up approach, identifying stocks in emerging markets that have growth characteristics she likes, including ever-higher earnings growth rates.
Still, in the end, the top holding in the American Century fund, Petroleo Brasileiro, is the very same top holding in the Templeton BRIC fund.