Emerging-market selloff strips $9.8bn from mutual funds

Emerging-market selloff strips $9.8bn from mutual funds
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First Published: Tue, Mar 06 2007. 06 06 PM IST
Updated: Tue, Mar 06 2007. 06 06 PM IST
By Sree Vidya, Bloomberg
Emerging-market mutual funds lost $9.8 billion (Rs43, 492 crore) in value last week after the biggest decline in stocks in developing countries since May.
US funds that invest in emerging-market stocks plunged by 7.4%, according to Morningstar Inc. in Chicago. Dreyfus Premier Greater China Fund, the best performer in the past year, fell by 11%, the most of any fund. Grantham Mayo Van Otterloo & Co.’s $13 billion Emerging Markets Fund III, the largest in the group of 121 funds, fell by 7%.
More than $1.5 trillion in market value has disappeared from global stock indexes since Chinese shares fell by 9.2% on 27 February, sparking a worldwide selloff. The MSCI Emerging Markets Index slid by 6.6% last week, after advancing by 29% in the preceding year. It was the biggest drop since May, when the index fell by 8.2%.
“These markets have gone too far, too fast and were absolutely due for a correction,” said Mark Headley, chief executive officer of Matthews International Capital Management in San Francisco, which manages $9.1 billion in Asia-focused funds. “Any further weakness in the US could be a precursor to a bigger selloff.”
The MSCI index, which tracks stocks in developing countries such as Brazil, Russia, India and China, climbed at an average annual rate of 23% in the past three years, nearly triple the pace of Standard & Poor’s 500 Index. The gains were led by China’s Shanghai SE Composite Index and Shenzhen SE Composite Index, which rose 115% and 131% in the past 12 months.
Losses Continue
Investors responded by depositing a record $42 billion into emerging-market funds in 2005 and 2006, four times more than the previous two years, according to Brad Durham, a managing director at Emerging Portfolio Fund Research Inc. in Cambridge, Massachusetts.
The MSCI index has lost 7% this year, compared with the 2% decline in the S&P 500. Investors pulled $615 million from emerging-market funds in the week ended 28 February, bringing net deposits this year to $6.2 billion, Durham said. That’s down from $19.9 billion in deposits during the period last year.
Emerging-market stocks fell by 3.9% today, the most in more than eight months, on concerns that world economic growth will slow. Indexes in Argentina, India, Russia, Taiwan, Malaysia, the Philippines and Poland all tumbled more than 3 %. Stocks in China fell by 1.6%.
Chinese stocks slumped last week after the government said it would crack down on excess speculation that had driven the market to records. The decline, combined with concerns that the US economy will slow, extended the slide to other Asian stocks and Latin American equities.
GMO, Dreyfus
In the past year, funds that invest in Asian stocks excluding Japan jumped 26 percent, more than any other category. Funds that invest in a diversified portfolio of emerging-market stocks climbed 13%.
GMO Emerging Markets Fund III, which has more than half of its assets in Taiwan, South Korea and Hong Kong, climbed by 12% in the past year. Arjun Divecha, the fund’s Berkeley, California-based manager, was not available for comment, according to spokesman Tucker Hewes.
The Dreyfus Premier Greater China Fund, which has $672 million in assets, advanced by 53% this past year to rank as the top performer in the category. Manager Adrian Au, based in Hong Kong, didn’t return a call seeking comment.
‘Painful Week’
The $1.1 billion Matthews China Fund slumped by 10% last week, the second-most of any others in the group. The Guinness Atkinson Asia Pacific Dividend Fund fell by 2.6%, the smallest one-week decline.
“It’s been a painful week for the emerging markets, but investors should be prepared for this or they are in the wrong asset class,” said Matthews China fund manager Headley. Matthews China fund climbed by 38% in the past year.
Headley said his main concern is the threat of a US recession, which could send emerging-markets stocks tumbling even more. Former Federal Reserve Chairman Alan Greenspan hinted at the possibility of a recession on 26 February, the day before the global plunge in stocks.
Edmund Harriss of Guinness Atkinson Asset Management, a London-based manager of $2 billion, said the pullback is an opportunity to add Asian stocks, especially those that benefit from infrastructure-related spending.
‘Buying Opportunity’
“The bears aren’t right yet,” said Harriss, who manages three Asia-focused funds including the 11-month old Asia Pacific Dividend Fund. He also manages Guinness Atkinson Asia Focus that has advanced at an annual pace of 21% in the past five years. “I’m viewing this as a buying opportunity.”
Harriss’s Asia Focus fund slid 4.8% in the week that ended on 1 March after climbing by 19% in the past year.
The recent slide should not scare away investors that want to add emerging-market stocks to their portfolios, although they should pick less volatile offerings, Morningstar analyst Bill Rocco said. Investors should buy funds that invest in a basket of emerging-market securities, preferably those that have both stocks and bonds, he said. Single-country funds are a poor choice because of their higher risk.
“Those will get hit harder when things get rough,” Rocco said.
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First Published: Tue, Mar 06 2007. 06 06 PM IST
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