Morningstar Advisor - April/May 2011 - (Page 24)

Investment Briefs Emerging-Markets Eye-Opener in Egypt The revolutions in Egypt and Tunisia have opened investors’ eyes to the risks involved when investing in emerging countries, according to Morningstar research and communications manager Jim Licato. Moreover, concerns are quickly growing that a domino effect might result, sparking similar outcomes throughout the Middle East and North Africa. Protests have recently popped up in Libya, Algeria, Yemen, Jordan, Bahrain, and Iran. Along with the potential for higher returns and diversification benefits, emerging-markets investments present special risks such as fluctuations in currency, foreign taxation, differences in accounting and financial standards, and in the case of Egypt, economic and political risks. It is easy to see what has drawn investors to this segment of the market. When they analyze emerging markets, investors see booming economic growth and opportunities that they often cannot find in developed markets. And in recent years, investors have been rewarded with solid returns. But as these latest events attest, investors must not forget the risks of emerging markets. A look at past downturns and recoveries can serve as a good reminder. This especially makes sense in emerging markets, where investors are not necessarily familiar with foreign economic, political, and social events. There have been many U.S. equity market downturns over time, with varying levels of severity and different lengths of recovery periods. The most severe downturn marked the start of the Great Depression, when stocks lost more than 80% of their value. The recovery period was more than 12 years. More recently, there was the 2001 market crash, when stocks plummeted 44.7% and didn’t recover until October 2006, and the 2007–2009 bear market, with its 50.9% decline. Severe downturns are not limited to the United States, of course. Common examples internationally are the Asian crisis in 1997 and the Russian financial crisis in 1998. The chart below illustrates the number of bear markets in emerging economies since 1988. Latin America experienced the most downturns, but had less of an average decline and was the quickest to rebound relative to all other regions. Asia and the Far East, on the other hand, experienced fewer, but more severe, downturns that took time to crawl out of. Declines are part of the market cycle and occur for many different reasons. Sometimes, stocks recover their value quickly, while other times the decline lasts for a while. Often, the decline is preceded by a period of high returns, which lulls investors into a false sense of security. Because no one can predict market declines with certainty, understanding the history, stability, and strength of a region is essential Emerging markets can be volatile and are often considered more appropriate for long-term investors, who can handle potentially large fluctuations in returns. This segment of the market is not for everyone, and your clients should be made well aware of the potential risks. Little-Known Funds, Well-Known Managers Big-name managers run funds with billions of dollars of assets. But fund analyst Gregg Wolper recently highlighted newer portfolios from well-known managers that have far less. Artisan Global Value ARTGX Managers David Samra and Daniel O’Keefe have put together an impressive record at the all-foreign Artisan International Value ARTKX. They won recognition as the 2008 Morningstar International-Stock Manager of the Year for their success at the $3.3 billion fund. They launched Artisan Global Value, which also owns U.S. stocks, in December 2007. It’s hard to see why this fund should have less than $50 million in assets. It’s possible that the lack of a three-year record inhibited investors; many people—especially advisors—like to see a fund pass that benchmark before buying it. Now, however, that reason not to buy the fund has passed. The fund’s three-year return places in the top decile of the world-stock category. Oakmark Global Select OAKWX This fund features just 20 stocks, picked by Bill Nygren and David Herro of Harris Associates. Each has won recognition as Morningstar Manager of the Year, and in 2010, Herro was named Morningstar InternationalStock Manager of the Decade. Yet Oakmark Global Select, launched in 2006, has just $435 million in assets. That’s much more than Artisan Global Value’s assets, but it’s hardly a substantial figure in the mutual fund world Global Market Downturns and Recoveries Periods of turbulence, 1988–2010 Number of Bear Market Downturns Greatest Decline Average Decline Avg Decline Duration in Months Avg Recovery Duration in Months* Emerging Markets Asia Europe Far East Latin America 3 5 3 7 3 –73% –75% –76% –61% –56% –57% –53% –58% –37% –45% 25 15 25 5 21 64 27 67 19 32 Developed Markets International Stocks *Calculations do not include recovery from the 2007-2009 downturn; the recovery duration is still unknown. 24 Morningstar Advisor April/May 2011

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2011

Morningstar Advisor - April/May 2011
Letter From the Editor
The Debate That Matters Most
What Can the Mutual Fund Industry Do Better?
Cool Logic, Warm Intent
How to Start a Mutual Fund
Owner and Operator
Middle East Revolts Roil Oil Markets
Four Picks for the Present
Investment Briefs
How We Improve Our Odds of Picking Outperformers
Health Care Survived 2010, but Investors Want Proof
The Global Fund-Leadership Playoffs: Europe vs. the United States
U.S. Fund Investors Have It Good
U.S. Fund Firms Learn to Speak UCITS
Balancing Act
The Tamer Ride
Investors Lend a Hand
Healthy, Wealthy, and Wide
Foreign Funds That Win at Concentration
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VAs Finish 2010 With a Solid Gain
Buying Good Funds, Poorly

Morningstar Advisor - April/May 2011