This month’s scenario: Your client is a wealthy business owner who wants to increase his portfolio’s exposure to the emerging markets and the BRIC-countries, in particular, by $50,000; he considers this a longer-term holding and is willing to accept substantial volatility.
Research: What research tools do you use to identify prospective funds for clients?
Carl J. Macko of Synergy Capital Management: Morningstar is the leading mutual fund research tool that Synergy Capital Management, LLC uses to build client portfolios.
We use Shareholder Services Group as our client account custodian, which also offers research from Thomson Reports and Credit Suisse Research, among others.
What specific fund categories would you recommend for the client’s consideration and why?
Given that the individual is looking for additional exposure to emerging markets and the BRIC (Brazil, Russian, India and China) countries, in particular, diversified emerging markets would be the category to begin research into an appropriate fund.
I would emphasize with the client the potential volatility within this sector, which can experience moves in the area of 20 percent, 30 percent or even greater on a yearly basis.
For example, the average diversified emerging-markets fund declined by 53.5 percent in 2008 and then increased by 73.61 percent in 2009. The individual must be comfortable with moves of these amounts, and possibly greater, and be willing to hold long-term (three to give years, minimum).
What specific funds and allocations would you recommend within those categories?
Currently, there are only two mutual funds that identify themselves as focusing predominantly on BRIC countries: the Goldman Sachs BRIC Fund (GBRIX) and the Templeton BRIC Fund (TABRX).
However, the Class A versions of both these funds have high front-end loads for $50,000 purchases (GBRIX, 4.75 percent; TABRX, 4.50 percent) and management expenses much higher than their industry averages.
The Class C shares eliminate the front-end loads, but have management expenses fees in the area of 2.8 percent, which are very high.
Therefore, the mutual fund I would suggest for this individual would be the T Rowe Price Emerging Market’s Stock Fund (PRMSX).
Currently, the fund has almost 53 percent of its exposure to the BRIC countries, as well as exposure to South Korea, Mexico, etc. The fund has a long track record (it was initiated in 1995), has a management expenses fee (1.32 percent) that’s much lower than its category average and contains no loads.
The T. Rowe Price Emerging Markets Stock Fund has 3-, 5- and 10-year average returns of -4.35 percent, 11.25 percent and 8.86 percent, respectively, roughly in line with its competitors.
Although it has slipped recently in terms of return and Morningstar ranking, Morningstar analyst William Samuel Rocco has recently commented that “those results were definitely an anomaly.”
The fund has a large and experienced management team.
As far as allocation is considered, I would limit an aggressive, long-term orientated investor’s exposure to the emerging-markets portion of her portfolio to the area of 10 percent.
Given the uncertainty surrounding world equity markets today, I would even suggest the individual consider dollar cost averaging into this fund over the next 12 months, possibly allocating an even $12,500 every 3 months to smooth out purchase prices, while keeping the remaining balance in a money market or Treasury bill fund until fully invested.