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Fund Watch

Emerging Markets Find Their Mojo

Two Chinese tech firms, Alibaba Group Holding and Tencent Holdings, are responsible for much of the growth.

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China may still be an emerging market, but consumers there are ahead of the rest of the world in mobile e-commerce. “They go to restaurants and swipe their phones to pay,” says Baron Emerging Markets manager Michael Kass. He adds that 70% of consumer purchases in China are electronic.

Kass identifies growth-oriented themes and combines them with nitty-gritty stock picking to run the fund. He has tapped into the mobile e-commerce trend with stakes in two Chinese tech firms, Alibaba Group Holding and Tencent Holdings. The stocks climbed 63% and 58%, respectively, over the past 12 months, which helped lift Baron Emerging Markets (BEXFX) by 21.1%.

See Also: 12 Investments to Cash in on China

But the fund, a member of the Kiplinger 25 fell short of beating the rise in the MSCI Emerging Markets index during that period, in part because the two heavyweight tech firms make up a bigger percentage of the benchmark than they do the fund. “I’m an asset manager and a risk manager, so I tend not to take a large position in an individual stock,” says Kass. He holds between 80 and 100 stocks and has a stellar long-term record. From the fund’s opening in January 2011 through this past September 29, Emerging Markets returned 5.9% annualized, outpacing the 1.6% return of the MSCI EM index.

India is another growth hot spot. Kass says tax and economic reforms under way there will lead to a “multiyear cycle of higher investment and productivity.” He has invested 15% of the fund’s assets in Indian stocks, including two financial services firms, Kotak Mahindra Bank and JM Financial.

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Emerging-markets stocks are in a good groove these days, says Kass. Global growth and trade are steady, China’s economic growth and currency remain stable, and, for now, President Trump’s protectionist policies don’t loom so large. Earnings growth is strong, too, says Kass. Analysts expect 12.1% earnings growth next year in emerging-markets stocks, which outstrips expectations for 11.5% in the U.S. and 7.3% everywhere else. Reforms established in recent years in developing countries are starting to produce results, says Kass, “and that’s exciting to me as a long-term investor.”

See Also: A Foreign Fund Manager's Favorite Stock Picks