Morningstar Advisor - December 2013/January 2014 - (Page 7)

Letter From the Editor Emerging Markets Are Not a Country Jerry Kerns Follow Jerry on Twitter @ jerrykerns As investments in traditional emerging markets continue to struggle, investors are going deeper into frontier markets. Promising places like Kenya, Ghana, Turkey, Colombia, the Philippines, Croatia, and Poland are the destinations of investors researching companies that will benefit from government stability, growing economies, and a rising middle class. The results are "funds that invest down the market-cap spectrum, across more sectors, follow alternative strategies, and invest in countries that 10 years ago would have been deemed too risky," writes associate editor Rob Wherry in his article "Knowing Where to Look" (Page 36) for this issue's Spotlight section. Wherry says that investors are rethinking not only how they get exposure to emerging markets but also the places they are going to find opportunities. One concern emerging-markets investors have is that capital inflows into these countries will dry up. The fear is that tighter monetary conditions, coupled with cyclical and structural factors, will bring a halt to economic growth. Morningstar economist Francisco Torralba, however, doesn't agree. For his article "Economic Vulnerability Varies by Country" (Page 40), Torralba created a gauge-what he calls a vulnerability score-that measures how susceptible the economies of emerging-markets countries are to a sudden stop of capital inflows. He found a wide range: Some countries show great risk, while others will be much less affected. Markets VWO-and other cap-weighted indexes have low exposure to the most significant trend in emerging markets-the rise in domestic consumption. This is because the largest companies in many developing countries are government-controlled banks and energy concerns, so they have a heavy presence in cap-weighted indexes. Instead, Oey says investors should consider rules-based emerging markets indexes that exploit investment factors such as size and low volatility. These indexes contain more consumer names. Of course, there's a downside to these type of indexes, which she explores in "Following the Rules" (Page 48). If you take one thing away from this issue, it's that not all emerging markets are the same. Each one has its idiosyncrasies. Many have ties to each other and developed countries, but each will react differently to global economic pressures. Just as it's a mistake to think of Africa as a country-and not a continent made up of 54 countries with thousands of cultures- it would be a mistake for investors to lump all emerging markets into one. Correction In the October/November issue, we mislabeled a section of Exhibit 6 in the article "Does Being Prudent Pay Off?" (Page 66). The label Probability of $0 Balance at Age should have read Worst Possible Return. The listed percentages are the worst possible return a person of that age could come across using the mentioned glide paths. In "Factor Investing in Emerging Markets" (Page 46), analyst Patricia Oey warns that the most popular emerging-markets exchangetraded funds-iShares MSCI Emerging Markets EEM and Vanguard FTSE Emerging 7

Table of Contents for the Digital Edition of Morningstar Advisor - December 2013/January 2014

Morningstar Advisor - December 2013/January 2014
Letter From the Editor
What’s Your Purpose?
Working for Gen Y
How to Allocate College Savings
Mobius Looks to a New Frontier
Investments á la Carte
Investment Briefs
How to Manage Bonds for Today and Tomorrow
Cloud Is the New Engine of Growth
Knowing Where to Look
Economic Vulnerability Varies by Country
Factor Investing in Emerging Markets
Following the Rules
Exploring Indexing’s Next Frontiers
Frequent Fliers
Family Blind Spots
Optimal Portfolios for the Long Run
Finding Value in a Pricey Sector
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Emerging-Markets Roller Coaster

Morningstar Advisor - December 2013/January 2014