Rethinking emerging-markets plays

Financial advisers are adjusting their approach to the inherently volatile emerging-markets sector after a rocky first half.

Although many advisers are maintaining their positions on the expectations of long-term growth in the sector, others see shifting market conditions as an immediate opportunity.

“There was this expectation that the developing world would grow as the developed world slowed,” said Dan Dingus, director of portfolio management at Fragasso Financial Advisors. “We’ve learned that the decoupling hasn’t really happened.”

In the first half, the MSCI Emerging Markets Index declined about 10%, though it has improved by more than 8% since June 24.

Two schools of thought have arisen, one based on patience and one on action. Mr. Dingus represents the latter, particularly when it comes to emerging-markets equities.

“A LOT OF PROMISE’

“There’s still a lot of promise in emerging markets, [but] you just have to counter with active managers in that space,” he said.

Bill Rocco, a senior fund analyst at Morningstar Inc., is more inclined to preach patience.

“This volatility isn’t a surprise,” he said. “You need to have a 10-, 15-, 20-year horizon, and you’ll see that these swings aren’t particularly severe.”

Endorsing the strategy of waiting out the market swings is Taylor Gang, vice president and wealth manager at Evensky & Katz LLC.

“This is still where you’ll see a large percentage of the world’s growth, so it certainly has a place in international allocations,” he said. “Long-term, you’ll wish you had an allocation.”

Evensky & Katz used to be bullish on emerging markets, but it got rid of its short-term exposure in 2010.

Christopher Cordaro, chief investment officer at registered investment adviser RegentAtlantic Capital LLC, also advocates patience and an eye for the long game.

“Long-term, emerging markets remain one of the most attractive asset classes,” he said. “We know they’re going to be volatile, and we expect EMs to be the most volatile asset class in our clients’ portfolios.”

In terms of specific markets, advisers have shown a willingness to stick with the BRIC (Brazil, Russia, India and China) economies, though with less of a reliance on China than in the past. And some see the Chinese economic slowdown and extrapolate the conditions to the entire developing world.

The opportunities increasingly found by Mr. Cordaro stem from the assumption that emerging markets are homogenous.

“One EM country will do something silly, and it’ll bring the whole index down,” Mr. Cordaro said.

“But this presents an opportunity,” he said. “I try to tell my clients, “We’re not buying countries, we’re buying stocks.’”