Mutual fund managers invest in emerging markets

Heidi Moore Jul 8, 2011

Mutual fund managers invest in emerging markets

Heidi Moore Jul 8, 2011

Tess Vigeland: Amid all the talk about raising the debt ceiling, you may hear some jokes about how China owns the United States. So how about owning a little bit of China?

Mutual fund managers are looking for more investments in growing economies like China, India, Brazil and Russia. Why? ‘Cause that’s where the money is. And so’s the risk. And that means your mutual fund managers may not be playing things as safely as they used to.

Our New York bureau chief Heidi Moore has the story.

Heidi Moore: This time of year, your mailbox gets full with reports about how your 401(k) is doing. Most people don’t look at them.

I don’t read them because I have all of 80 cents in my 401(k). But when I got the report from the Oakmark Funds, I looked at a little insert that fluttered out. It was bland, but the news was pretty big: Oakmark said it may change its strategy. It used to keep limits on how much money it invested in India, China, Russia, Brazil and other countries that are called emerging markets. Now it’s dropping those limits.

It’s not just Oakmark. Adam Bold, the CEO of the Mutual Fund Store, says fund managers are sick of trying to scrape decent returns out of the slowing
U.S. economy.

Adam Bold: The fund manager’s saying ‘hey, these lines are getting blurred. We need to be able to go where the best stocks are, regardless of what the classification is.’ We’re seeing that as a trend throughout the industry.

I checked Oakmark’s performance a few pages in. In the past 10 years, it failed to beat the market around 80 percent of the time. They lost even more ground in the financial crisis. And it looks like they want to take bigger risks to make better returns. They’re doing it with my 80 cents and part of your 401(k).

It’s easy to see why. Those emerging markets are growing fast — at around 6 percent a year. The U.S., on the other hand, is growing less than 2 percent a year.

Here’s Josh Brown. He’s a financial planner in New York.

Josh Brown: They’re looking out longer-term and they’re saying, these are the next places that are going to be developed markets. That’s the thesis why investors should be there.

Brown makes a good point. He says that here in the U.S., the middle class is getting squeezed. In countries like Brazil, China and India, the middle class is growing.

But here’s a little history. Investors got burned before while chasing these returns. There was the “tequila crisis” in Mexico in 1995. Then there was the Asian flu. Then Brazil, Argentina and Russia. The phrase “too big to fail”? That wasn’t about banks. That was about these countries.

Here’s Josh Brown again.

Brown: The risks are the same as they ever were. These are countries that are relatively new to democracy in some cases and certainly new to capitalism in all cases.

The difference is that before, banks bore the brunt. This was too exotic for mutual funds, so most regular people didn’t get hurt. And now, the mutual funds may be too late. The really smart money has been going in this direction for years. There may not be many good deals left for the rest of us.

There’s also another big problem. It came to me when I was walking around my neighborhood in New York City. Jackson Heights is filled with Indian immigrants. They come to the U.S. to make more money, and they know the rules.

But when mutual funds try to put their money in India — or China or Russia or Brazil — they don’t know the rules. Accounting is different. Bribes are pretty common. Even the best investors get burned.

George Iwanicki: You have to make sure you know what you own, which means you have to do on-the-ground research.

That’s George Iwanicki. He comes up with investing ideas for JPMorgan’s wealthiest clients. He says these countries can be profitable, but fund managers have to do their homework. They have check for “the rule of law.” They have to hire people in those countries. And regular people have to check up on their mutual fund managers.

Sure. Naturally. That would be the right thing to do. But remember how we never read those reports?

In New York, I’m Heidi Moore for Marketplace Money.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.