Home' Trinidad and Tobago Guardian : November 22nd 2015 Contents NOVEMBER 22 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
MUTUAL FUNDS | SBG11
hen you’re built
investing, you act
why it’s important
to check what’s in
your emerging-market stock fund—even if
it’s an index fund.
Emerging-markets index funds track dif-
ferent indexes, which can have very different
exposure to different parts of the world.
And as Brazil, India and other emerging
market economies move in increasingly dif-
ferent directions, actively managed funds
are looking more distinct as well.
Some managers are avoiding broad swaths
of the developing world, and they say their
funds have never looked this different from
their index-fund rivals.
The big differences in composition can
lead to big differences in returns. All of the
20 largest emerging-market stock mutual
funds are down this year, but by anywhere
from 3.9 per cent to 21 per cent, as of
Wednesday. That gap of more than 17 per
centage points is much wider than the 7.4
point gap in performance for the biggest
funds in the largest category of US stock
The changes in portfolio focus are occur-
ring as more dollars head into emerging-
market stock mutual funds and exchange-
traded funds. More than US$5 billion flowed
into them in the first 10 months of the year,
according to Morningstar, at a time when
nearly USUS$73 billion left US large-cap
If you want to join the tide into emerg-
ing-market stock funds, it’s important to
ask a few questions:
1. If it’s an index fund, what index
does it follow?
It may seem like a boring question, but
it can make a difference, as a look at the
two largest emerging-market stock ETFs
The iShares MSCI Emerging Markets ETF
keeps nearly a sixth of its portfolio in South
Korean stocks, such as Samsung Electronics
and Hyundai Motor. The only country that
accounts for a bigger per centage of its port-
folio is China.
Vanguard’s FTSE Emerging Markets ETF,
meanwhile, doesn’t own a single Korean
stock. That’s because the two ETFs track
different indexes, which disagree on whether
South Korea is an emerging market or a
Despite the difference, the two ETFs have
performed similarly this year: Both lost 11
to 12 per cent, including dividends, as of
Wednesday. But the ETFs are set to get even
more different. The Vanguard ETF is in the
process of adding small-cap emerging-mar-
ket stocks to its portfolio, which are generally
riskier than large-cap stocks but have the
potential for bigger gains.
The Vanguard fund is also bringing in
so-called A-shares of Chinese companies.
These shares are listed in Shanghai or Shen-
zhen, and the Chinese government has only
recently begun loosening limits on foreign
ownership of them. A-shares have had much
sharper jumps up and down than the Hong
Kong-listed shares that many emerging-
market stock funds focus on.
2. If the fund is actively managed,
what is it flocking to and
Emerging-market stock indexes tend to
be full of state-owned companies in China
and commodity producers in Brazil and
Russia. These are precisely the stocks that
many active managers say they’re most keen
China’s growth has slowed sharply, as the
government tries to shift the economy away
from industrial-led gains to one more
dependent on consumer spending. That has
helped send prices for metals and oil tum-
bling, which hurts Brazil and Russia. They’re
big commodity producers, and both their
economies are in the midst of recessions.
That’s why Laurence Taylor, portfolio
specialist at T Rowe Price, says adhering to
an index is akin to “investing in the history
of emerging markets.” He prefers countries
that are smaller players in emerging-market
stock indexes, but where growth prospects
look better, such as Indonesia and the Philip-
pines. He also favors India, which is well
represented in emerging-market indexes.
Actively managed funds can also steer
clear of places where politicians are making
things difficult. When Russia, which makes
up about 4 per cent of emerging-market
stock indexes, annexed Crimea in 2014, it
led to an international uproar and sanctions
that hurt Russian companies badly.
Lee Rosenbaum, portfolio manager at the
Loomis Sayles Global Equity and Income
fund, which can invest anywhere around
the world, sold the fund’s investment in the
Russian Internet company Mail.ru after the
upheaval. Now he says it’s safe to assume
it won’t be buying another Russian stock
again for a while.
3. What are the fees?
As with investments in all funds, try to
keep expenses low, regardless of whether
you opt for a fund that tracks an index or
is actively managed.
Investing in emerging markets can be
expensive in general, and the average expense
ratio is 1.56 per cent for mutual funds in
the category. That means US$15.60 of every
US$1,000 invested goes to cover fund man-
ager salaries and other costs.
A fund manager with higher costs will
need to perform that much better just to
match the after-fee returns of lower-cost
funds. AP’s STAN CHOE
emporary solutions have a way of
becoming permanent. The fate of Fan-
nie Mae and Freddie Mac, the two
that stand behind much of America’s
housing market, is a case in point.
The two, which buy American mortgages from banks
and other originators, bundle them into securities and
resell them to investors with a guarantee, are stuck in
a technocratic no-man’s land. Their status has not
yet been normalised after their first bailout, but they
may soon require a second. If they do, the adminis-
tration of President Barack Obama, which has been
running them since 2009, will be largely responsible.
Fannie and Freddie were tethered to America’s hous-
ing market when it fell off a cliff in 2008. They faced
a double impact: they had to honor their guarantees,
while also suffering losses on their own big portfolios
of mortgage-backed securities. The firms had an odd
ownership structure, with a public charter, and thus
an implicit government guarantee, but private share-
holders. To stop them from collapsing, which would
have further hurt both the housing market and the
financial system, the government injected US$188
billion and placed them into conservatorship, a form
of government control. A further backstop, currently
US$258 billion, has yet to be invoked. All in all, the
rescues were the largest in financial history.
Since 2012, however, in an effort to claw back the
bailout, the Treasury has pocketed all of the companies’
profits—much to the dismay of their shareholders,
whose rights have been suspended, prompting some
of them to sue the government. Altogether the taxpayer
has recouped US$239 billion from the firms—more
than the cost of the rescue, but not yet enough to
compensate for the risk taxpayers have assumed, said
Edward Pinto of the American Enterprise Institute, a
right-leaning think tank.
These profits, though, are not guaranteed. On
November 3 Freddie Mac announced that it had lost
US$475 million in the third quarter of 2015, its first
loss since 2011. Write-downs on the value of inter-
est-rate derivatives, which both companies use to
hedge their risks, were to blame.
Such paper losses would be no cause for worry,
were it not for the companies’ thinning capital cushions.
Under the terms the Treasury imposed in 2012, the
two must reduce their capital by US$600 million a
year, remitting those funds to the taxpayer in addition
to any profits. As a result, by 2018 they will have no
capital whatsoever. Even a single paper loss will leave
At the same time the two are becoming less prof-
itable. Their portfolios of mortgage-backed securities,
although lucrative in good times, look like taxpayer-
financed speculation. Under the terms of the bailout,
they must run them down and focus only on issuing
A second bailout would not be proof of misman-
agement at Fannie and Freddie. It would be necessary
only because the Treasury has been feasting on their
capital. However, it might provide fresh political impetus
for reform. Rumours that the Obama administration
had given up waiting and was about to release the
companies from conservatorship caused their share
prices to spike in October, before Treasury Secretary
Jack Lew insisted that nothing had changed.
Getting the government out of the housing market
will be difficult. Every time Fannie or Freddie guarantees
a new long-term mortgage, the Treasury’s backstop
is in effect renewed for 30 years.
Congress has been able to agree on one thing: On
November 16 the House passed a Senate bill to cap
the salaries of the companies’ chief executives at
US$600,000. That does not address the problem at
hand, but taxpayers doubtless will cheer anyway.
Fannie Mae and Freddie Mac:
With emerging-market stock
funds, check what’s in the tin
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