Fidelity's new emerging-markets fund breaks new ground

Fidelity Investments' recent launch of an emerging-markets fund may signal the next frontier, but emerging markets' reputation for risk will likely lead investors to keep exposure to a minimum. The Boston-based fund firm's Emerging Europe, Middle East and Africa Fund (FEMEX) is the first mutual fund offered in the United States that includes these regions together within an emerging-markets fund, according to Lipper Inc., a New York-based research firm. Similar funds have been offered in Europe, said Fidelity portfolio manager Adam Kutas. There are also a number of exchange traded funds that invest in the region. "These things are going to grow faster than [Brazil, Russia, India and China investments]," Rob Williams, an adviser and portfolio manager at Baltimore-Washington Financial Advisers Inc., said of the traditional BRIC block of emerging-markets countries. The Columbia, Md., firm manages $200 million in assets. "There is a tremendous opportunity for growth," Mr. Williams said. But risk is a consideration, he said. "As a small portion, emerging- market funds are an important part of someone's account," Mr. Williams said. "Exposure should be kept real small at 2% to 5%." New York-based Lipper senior research analyst Jeff Tjornehoj agrees. "It will appeal to the most gunslinging investor out there, who will be ready to bet on a roller coaster ride if they get in at the right time and out at the right time," he said. "There is risk. Hopefully, there is also a better opportunity for growth," Mr. Kutas said. "That is the trade-off. As far as what percentage of the fund could be represented in a portfolio, you have to know your client and their level of risk tolerance," Mr. Kutas said. "I would never recommend it as the core investment, but it can be a compelling part of that," he said. Mr. Kutas added that there is a lot of risk management behind the fund. In addition to six research analysts devoted to the region, Fidelity has an international-markets committee that reviews each country before the fund invests, he said. The low correlation to the Standard & Poor's 500 stock index and other developed-market indexes make the fund a good diversifier, Mr. Kutas said. Investors need to consider how volatile the market is, said Neil Elmouchi, president of Summit Financial Consultants Inc./LPL Financial of Westlake Village, Calif., which manages $150 million in assets. "The thing I would be looking at is [whether you are] getting rewarded enough," he said. "I would only put a few percentage points to test the water. I'd want to get some history." A 12-year veteran of Fidelity, Mr. Kutas co-managed the Fidelity Latin America Fund (FLATX) in 2005 and 2006. "I think in theory, the [new] fund should be less volatile. It involves a larger number of countries and lower correlation between those countries," Mr. Kutas said. Their markets don't move in the same direction at the same time, he said. The new fund encompasses 80 countries, 1.5 billion people, 97% of the world's platinum reserves, 83% of the world's oil market and half of its iron ore reserves, Mr. Kutas said. "There is $400 billion earmarked for infrastructure improvements in the region," he said. "Half of the world's top 20 fastest-growing cities are located there." Investors are already eyeing the region, Mr. Kutas said. "Hedge funds and private-equity money is going into Africa quite aggressively now," he said. The fund could close early if it proves to be too popular, according to Mr. Tjornehoj. "It happens to be in countries where few companies are publicly traded," he said. Therefore, with few choices, investors could pour money into the fund, allowing it to reach a manageable capacity very quickly. The fund should grow with the region, Mr. Kutas said. Much of the trading activity in Africa is in countries such as Nigeria, Zambia and Kenya, he said. "Nigeria, for example, is home to 140 million people, and they are part of [the Organization of the Petroleum Exporting Countries]," Mr. Kutas said. "They are very well-positioned for a lot of growth," he said. "A lot of these companies have low liquidity, and you have to be cognizant of that." The region has about 1,000 companies that are trading, Mr. Kutas said. "The [initial public offering] pipeline is very heavy, particularly in the Middle East," he said. "There is every indication that Saudi Arabia wants to open up their market." The Emerging Markets Fund is open to retail investors and available through banks, broker-dealers, insurance companies, financial planners and retirement plan administrators as part of Fidelity's Advisor series. The mutual fund is closest in similarity to Baltimore-based T. Rowe Price Group Inc.'s Africa and Middle East Fund (TRAMX), Mr. Tjornehoj said. The fund, launched last September, had garnered $779 million in assets as of last Tuesday. E-mail Sue Asci at sasci@investmentnews.com.