Emerging markets have been a staple for at least a decade among investors who value portfolio diversification. The asset class went mainstream in the mid-1990s with the launch of a variety of mutual funds targeting the stock markets in the developing world.
The last several years have been especially sweet for the asset class, delivering double-digit gains for three years in a row through 2005. This year doesn’t look too shabby either. Despite the correction in the MSCI Emerging Markets Index earlier this year, the stocks are up nearly 14% so far in 2006 through yesterday.
Adding luster to the asset class is the growing stack of research that sings a familiar song: emerging markets stocks are a valuable diversification tool for conventional domestic stock/bond portfolios. A familiar argument is of a type found in an essay by George Hoguet, the emerging markets investment strategist at State Street Global Advisors. Diversification, return enhancement and a general expansion of the so-called investable opportunity set are the main benefits, he wrote. In the long term, Houget counseled, “adding emerging markets to your portfolio can both increase return and lead to diversification.”
Houget’s far from alone in promoting emerging markets of late. That’s the nature of bull markets. But while the crowd loves the asset class these days, Jeff Troutner has another view, namely: emerging markets haven’t lived up to expectations and so it’s time look elsewhere for diversification benefits.