Emerging-market funds: Can the hot streak last?

Although the biggest equity gains continue to come from markets outside the United States, some analysts wonder how long the winning streak can continue for funds that are fueled by emerging markets. Year-to-date through July 31, world equity funds posted an average return of 25.44% — nearly double that of domestic equity funds, which returned 14.59%, according to a report issued by New York-based Lipper Inc. In July, the five best-performing of the fund industry’s 25 largest mutual funds invested some or all of their holdings in international and emerging markets, Lipper found. But investors may already have reaped the best returns that emerging-market funds have to offer. “We are probably due to give back some of these gains,” said Jeff Tjornehoj, a senior research analyst at Lipper. “I think we are on the cusp of a pessimistic view of the global recovery and are probably due for an inflection back in the other direction,” he added. Mr. Tjornehoj is hardly alone in his view. “To expect the gains that we have seen since March to be repeated through the remainder of the year is wishful thinking,” said Bill Rocco, a mutual fund analyst who specializes in emerging markets at Morningstar Inc. of Chicago. Others, however, think there are still gains to be had even by those who are late to the party. It’s not too late to buy in, said Brian Terry, vice president and chief compliance officer at Financial Management Concepts Inc. of Winter Springs, Fla., which has $90 million in assets under management. “We’re not that far up from the bottom [of the markets] that you can’t still get in and make money this year,” he said. “Even if you missed the bottom, the opportunities are there. We have seen more strength and opportunity internationally, in Europe and emerging markets,” Mr. Terry added.