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Emerging Markets

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Emerging markets refers to stock markets of economies which are developing (e.g., China, Russia, Mexico, etc.).  Investing in emerging markets is often done with a small portion of one's portfolio in order to get the diversification benefits offered by this asset class.  Also, see Currency Hedging.

Steven L. Beach, "Why Emerging Market Equities Belong in a Diversified Investment Portfolio," Journal of Investing, Winter 2006, pp. 12-18. "Historical evidence, including analysis of downside risk, provides ample proof that emerging market equities have provided returns sufficient to compensate for their risk. ... investing in a broad emerging-market index fund can provide significant return opportunities, without the country-specific risks. In summary, diversified investment portfolios should contain both developed international and emerging market equities."

William J. Bernstein, "Rebalancing Individual National Markets," Efficient Frontier, Spring 2000. Discusses the benefits of an emerging markets fund equal-weighted across countries.

David G. Booth, "Active Management's Failure to Deliver in Emerging Markets: A View from the New Economy," Institute for Fiduciary Education, July 1 2000 (156kb). This article points out that, compared with passively managed funds, actively managed funds haven't faired particularly well in emerging markets.  This is contrary to the conventional wisdom, which suggests that less efficient markets are more amenable to active management.

Asani Sarkar and Kai li, "Should US Investors Hold Foreign Stocks?," SSRN abstract #319754, January 2002 (47kb).  This paper finds that, if short selling is not allowed, there is no diversification benefit for US investors to diversify in foreign developed markets.  However, diversification into Emerging Markets remains beneficial under this constraint.

Yesim Tokat, "International Equity Investing: Investing in Emerging Markets," Investment Counseling & Research ANALYSIS, July 2004 (755kb). A good discussion of issues surrounding investing in emerging markets.

Karen Umland, "Emerging Markets: Managing Risks," Institute for Fiduciary Education, 2003 (313kb). A good discussion of the risks associated with investing in emerging markets.

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