Capital Research and Management Inc.'s American Funds is preparing to launch its first pure-play emerging-markets equity fund as the asset class suffers from growing pains.
Diversified-emerging-markets funds have lost an average of 8% this year, thanks mainly to slowing growth in China and other major emerging countries.
The American Funds Developing World Growth and Income Fund will focus on investing in dividend-paying emerging-markets stocks, which the company thinks will be “more resistant to market declines than stocks of companies that do not pay dividends,” according to a filing with the Securities and Exchange Commission.
The fund will invest a minimum of 80% of assets in emerging-markets companies or companies that generate at least 50% of revenue from emerging markets, according to the filing.
That distinction separates it from the $20 billion American Funds New World Fund (NEWFX), which takes a more conservative approach to emerging-markets investing. Just 42% of its assets are in emerging-markets companies as of June 30, according to Morningstar Inc.
(Check out what other money manager plans to launch an emerging market fund.)
The new fund is the latest in an unusual flurry of mutual fund launches for American Funds. After launching just three funds during the 2000s, American has launched eight funds-of-funds and a series of college target date funds and put three bond mutual funds on deck in the past year.
“Many years of steady outflows has caused them to rethink some practices,” said Janet Yang, a mutual fund analyst at Morningstar. “Now they're offering advisers and investors more traditional, style-specific strategies.”
American Funds has seen more than $300 billion walk out the door since the financial crisis, but there are signs that things are
starting to turn around.
In January,
American had its first month of net inflows since May 2009. Even though that momentum hasn't kept up, the $9.6 billion of net outflows this year through July are far better than the $33 billion that was pulled during the same period a year earlier.
The emerging-markets fund could be another step in the right direction for the company. Despite the poor performance of the asset class,
demand for emerging-markets stocks has been surprisingly resilient.
Emerging-markets stock funds had net deposits of $27 billion this year through July, while the far-better-performing U.S. large-cap-stock funds have had net deposits of just $5 billion, according to Morningstar.
In fact, emerging-markets stock funds haven't had a single month of net outflows since 2011.
Dividend plays have always been successful in emerging markets in recent years.
The dividend-focused $4 billion WisdomTree Emerging Markets Equity Income ETF (DEM), for example, has three-year annualized returns of 2%. The market-cap weighted $47 billion Vanguard FTSE Emerging Markets ETF (VWO) is flat over the same period.
Financial advisers seem willing to give the new fund a chance.
"Like all fund families, they have the ability to excel in any particular sector. If they do, it's going to hit our screen and we'll take a look at them," said Richard Saperstein, chief investment officer of Treasury Partners at HighTower Advisors LLC.
"It's interesting since emerging markets have been out of favor recently," said Melissa Joy, director of investments at the Center for Financial Planning Inc. "It's not just the strategy du jour."
