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. Last Updated: 07/27/2016

Emerging Market Gains Pale Compared to Losses

Emerging market funds, only a year ago considered submerging funds, have surfaced again with a vengeance, up 33 percent since the first of the year.

But before anyone starts thinking that emerging markets are again the in thing, listen to someone who invests in emerging markets for a living: "There seems to be a lot of manic-depression investing in emerging markets,'' said Rajeev Bhaman, manager of Oppenheimer's Developing Markets Fund. "People get overly excitedand invest, then get overly depressed and there are enormous swings in the market. The markets are very volatile because of people's perceptions.''

Those perceptions are based on reality. Consider just the past two years: the Asian financial collapse, the Russian devaluation of the ruble and default on debt, the Brazilian financial soap opera, the Long-Term Capital Management debacle last fall, which virtually shut down bond markets by draining liquidity.

All of which led to very depressed markets, and, eventually to recoveries with some spectacular year-to-date gains. Those gains need to be taken with a grain of history because when you got into some funds really matters.

For example, while emerging-market funds are up 33 percent from January, they are up only 13 percent for the past 12 months. Latin American funds, up 25 percent year-to-date, are still down 5.4 percent in the past 12 months. Going the other way, Pacific region funds - with and without Japan in them - are up in the 35 percent to 42 percent range year-to-date, but for the 12-month period, they're up 42 percent to 60 percent. Their recovery started a lot earlier.

Here are two extreme but not uncommon examples of how strong a stomach you need to be in these markets. Both funds are up this year, but if you were an initial investor in either and haven't sold, you are losing money.

The Lexington Troika Russia Fund was up 97 percent at the end of June, which is spectacular, but if you owned the fund for a full year, you lost 26 percent. Mathews International Korea Fund is up 239 percent in the past 12 months, and about 80 percent this year so far. But the Korea fund was $2 a share June 30, after being $6.52 a year earlier. It was $7.30 June 24, galloping back from that $2 price. Quite a ride.

Russia's economy now is based on oil prices, higher now as Asia recovers but depressed during the Asian crisis, said Lexington managing director Lawrence Kantor. When the fund started, "We envisioned volatility, but we didn't expect to see it move up so quickly, and again we didn't expect the devaluation of the ruble and the default on debt.'' The Troika fund was $24.21 a share Sept. 30, 1997. One year later, it was $2.83, down almost 90 percent. On June 24, it was $5.21 a share, but how many investors jumped or were thrown off the droshky, or sled, as the Troika went runaway?

And yet, none of that is unusual with emerging-market funds.

Paul Mathews, who manages the Korea fund, said Korea cited the country's restructured economy, the floating of its currency, opening to foreign investment and making companies more transparent to outside investors as reasons for the turnaround. But, he cautioned, "We would never expect it to be a straight line up from here on.''