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Top Pick For A Winning Emerging Market Fund Mutual Fund

We sit in a period where emerging markets haven’t been so popular.  Over the last 10 years the diversified emerging markets index has gone nearly no where, having been left in the dust by US Equities or a globally diversified portfolio.  From 2008 through 2016, the S&P 500 Index returned 7.1% per year, providing a total return of 85.5%.  During the same period, the MSCI Emerging Markets Index lost 1.3% a year, providing a total return of -11.3% all the while volatility as about 50% greater than the S&P 500 Index.  The result of all the gloom and pain emerging markets have inflicted has been that many investors are simply under weighted to emerging markets, which represent about 13% of global market capitalization.

But the time to buy is when there is a clouds in the sky.  Using Shiller’s CAPE 10, which has about a 75% correlation with future 10 year returns, emerging markets are forecasted to have a significantly higher growth rate than US Stocks.  From Research Affiliates Website, we are looking at apprx 7.5% real return (above inflation) over the next 10 years compared to 1% for the S&P 500.

To make a bit of a logical comparison, the CAPE 10 of emerging markets in 2008, when the post-ceding 10 year returns would be nearly 0 was around 37, a record high for emerging markets.  The US CAPE 10 at that time was only about 28 .  Current Cape 10 for Emerging market is over 60% less, at 14 — relative to 2008, emerging markets are a bargain.

Here’s the problem, investing on the the CAPE ratio alone, is painful.  Using nearly any CAPE strategy you would have been investing in an emerging markets index for the last 5 years, waiting for the massive growth.  Its not easy to see your portfolio flat-line while the rest of the world passes you buy.  So I decided to take a look and see what (if any) emerging market mutual funds had done exceptionally well in the last 5 years — mutual funds that took away the pain.  There were exactly 10 funds that had returned over an average of 5% annually in a category where the average return was -0.34%.   Simply picking a mutual fund though based on how it has done isn’t the best logic, so I decided to see which ones had manager who were eating their own cooking and had over $1 million of their personal dollars invested in the fund.  The highest performing fund I found with manager investment above $1 million was the  Seafarer Overseas Growth and Income Fund.

Launched in 2012 the Seafarer Overseas Growth and Income Fund is a relatively unknown fund.  The firm only operates 1 other fund.  Total assets in the fund are 2.1 billion, by no means a large amount for a mutual fund.  Relative to the fund size, the manager investment above $1 million is rather commendable.  The holdings, 40 in total, reveal that this fund is far from a closet index and the turnover is less a mere 7% making this fund highly tax efficient.

Founder of a home service / specialty trade contracting company (think patio's and deck) with a focus on customer experience. Quantitative investor. Data driven marketer. Runner.

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