Emerging markets too hot to handle, fund closures show

A recent rash of fund closings might be an indication that it is time to slow down on emerging-markets equities.

Within the past two months, three of the five largest actively managed emerging-markets funds either have closed to new investors or said that they soon will do so. Existing shareholders still will be able to invest new money with the funds.

The moves aren’t a sell signal, but they may make investors consider whether they should continue pumping new money into emerging markets, said Gregg Wolper, a senior mutual fund analyst at Morningstar Inc.

“It’s a wake-up call,” he said.

“If you have been putting money into emerging markets, this gives you a chance to reconsider,” Mr. Wolper said. “If markets were really cheap, maybe they wouldn’t all be closing.”

Lou Stanasolovich, president of Legend Financial Advisors Inc., is doubtful about the potential of emerging markets over the near term and said he’s currently just “dipping a toe in” because the emerging markets are largely commodities-driven, and with growth slow, the demand for commodities has slowed.

“We really like that funds close. At the same time, it could be a signal the market is overbought,”Mr. Stanasolovich said.

LOCKING THE DOOR

The $33 billion Oppenheimer Developing Markets Fund (ODMAX), the largest actively managed emerging-markets fund, said this month that it will close to new investors in April.

The closing will help position the fund for continued long-term growth, said spokeswoman Kaitlyn Downing.

That fund joins the $10 billion Aberdeen Emerging Markets Fund (GEGAX) and the $8.3 billion Virtus Emerging Markets Opportunities Fund (HEMZX), the fourth- and fifth-largest such funds, respectively, in closing to new investors this year.

The $16 billion Lazard Emerging Markets Fund (LZEMX), the third-largest actively managed emerging-markets fund, closed to new in-vestors in 2010.

That leaves the $20 billion American Funds New World Fund (NEWFX), the second-largest actively managed emerging-markets fund, as the last of the top five that won’t be closing to new investors anytime soon.

Mutual funds typically close to new investors when they get too big, either through market appreciation or because of new investments, for the managers to execute the strategy. If they remain open, the managers likely will be forced to put new cash to work buying stocks they don’t particularly like, or let the cash holdings drag down performance.

American Funds uses a multimanager approach to investing funds, so as the New World Fund continues to grow, it simply will add more managers to handle the workload and bring new ideas to the team, spokesman Chuck Freadhoff said.

NOT A SURPRISE

The emerging-markets-fund closings aren’t particularly surprising, considering how popular the sector has been since the financial crisis.

As of Jan. 31, emerging-markets funds had received $92 billion of new investments since the start of 2009, according to Morningstar.

Total assets stand at $256 billion, up from $66 billion at the end of 2009.

The enthusiasm hasn’t been confined to actively managed emerging-markets-equity funds. The $61 billion Vanguard FTSE Emerging Markets ETF (VWO), the largest emerging-markets vehicle, and the $50 billion iShares MSCI Emerging Markets ETF (EEM) have combined to take in $62 billion in new investments over the same time period.

The vast flow of new money has come in spite of the volatility in emerging-markets stocks.

After falling almost 50% in 2008, the MSCI Emerging Markets Index rallied 68% in 2009 and 16% in 2010.

Then it fell again in 2011, losing almost 20%, and rallied again last year to a 20% gain. It is down about 2% so far this year.

The infatuation with emerging markets isn’t expected to slow down anytime soon.

A majority of financial advisers — 51.4% — plan to increase their clients’ allocation to emerging-markets equity this year, according to the InvestmentNews 2013 Investment Outlook survey.