An article in The Wall Street Journal indicates that emerging market mutual funds have a wide range of year-to-date (YTD) returns:

The average diversified mutual fund focused on emerging markets is up 1.2% in 2013 through October, according to researcher Morningstar Inc. But the range of returns is wide, from a gain of more than 24% to losses of more than 7%.

One of the strongest performers described in the article is the Thornburg Developing World Fund (THDAX, class A shares) with a YTD return of approx. 14%. With its inception in mid-December 2009, the fund has a relatively short history, yet Morningstar already rates it Five Stars / Bronze in the Diversified Emerging Markets category. Similarly, Lipper rates the fund a Five in the Total Return, Consistent Return and Tax Efficiency categories in the Emerging Markets asset class.

Let’s take a closer look at the fund’s performance from the Alpholio™ perspective. Here is the cumulative RealAlpha™ chart for the fund, starting three full months after the fund’s inception:

Cumulative RealAlpha™ for THDAX

Following three years of a largely unimpressive performance on a truly risk-adjusted basis, the fund has generated a substantial amount of RealAlpha™ earlier in 2013. However, as the chart shows, this outperformance peaked in May and has been on a decline since then. This may be a sign of reversion to the long-term historical pattern.

The following chart shows the percentage weights of exchange-traded products (ETPs) in the reference portfolio for the fund over the same analysis period:

Reference Weights for THDAX

The top-three equivalent ETP positions for the fund in emerging markets were in the iShares MSCI Hong Kong ETF (EWH; average weight of 17.1%), iShares MSCI Malaysia ETF (EWM; 15.9%), and iShares MSCI Singapore ETF (EWS; 11.7%).

It is worth noting that, as a proxy for foreign holdings, the fund also invests in domestic stocks with a substantial exposure to emerging markets. For example, according to the most recent holdings report, the fund held positions in Qualcomm (QCOM; 2.5%), Yum! Brands (YUM; 1.9%), First Cash Financial Services (FCFS; 1.9%), and Colgate Palmolive (CL; 1.9%).

According to the article

The $1.5 billion fund is positioned to capitalize on growing consumption in developing nations, says manager Lewis Kaufman. It has about half its portfolio in consumer-facing businesses…

This investment tilt is reflected in an equivalent position in the Vanguard Consumer Discretionary ETF (VCR; average weight of 11.1%).

As the following chart from the article depicts, returns of emerging market stock funds have been quite volatile this year:

Rocky Road to Small Gains in Emerging Market Stock Funds

The big decline in May-June was caused by an indication by the Federal Reserve that it may begin tapering its quantitative easing strategy by year’s end, which caused the domestic interest rates to rise and emerging market currencies to fall against the dollar. As a result, there was a huge outflow of capital from emerging markets — investors saw a better reward-to-risk opportunity at home.

When in September-October it became clear that the Fed will continue with its policy at least in the near term, emerging markets rebounded. However, since the Fed’s bond purchases will not last forever, the emerging markets will undoubtedly be again affected. This underscores the wide range of returns of foreign investments caused by changes in the domestic monetary policy.


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