Emerging Market Returns Wrong?

July 28, 2009

A London Business School prof is saying that emerging markets' growth over the long term is actually half of developed markets. That really sounds fishy to me.

But far be it for me to argue with such an esteemed academic. In case you missed it, Jason Zweig in the Wall Street Journal over the weekend quoted Elroy Dimson of the London School of Business with new stats on returns from 50-plus emerging markets.

His claims of emerging market returns being reported as much too lofty over the longer term seems like a classic case of data mining to me. (See link to related article here.)

Just look at the iShares MSCI Emerging Markets Index (NYSEArca: EEM). It's up roughly 100% since the beginning of 2004. During the same time, the S&P 500 is negative.

Even though these are fairly short-term performance numbers, it still begs the question of where you want to put your money going forward. Emerging markets fall hard. But what the good professor isn't taking into account is that with exchange-traded funds, you can easily set stop-loss orders. That's like a built-in risk control feature.

A lot of people don't use them, however. That's a shame and it can often keep investors out of more volatile waters such as developing markets. We've been invested in EEM since December 2008. It's a core holding for us and we believe in the growth story going forward of emerging markets.

To base all future allocation decisions on very general and long-term performance numbers may seem like a way to get ahead of the curve. Actually, in investing, putting on such blinders can open you to data manipulation and leave you behind the curve.

A little common sense may be in order, folks. For example, almost anywhere you look—Brazil, China, Russia, India—they're all much different today than they were 20-30 years ago. And don't forget, the U.S. was an emerging market at one time.

Anthony Welch is co-portfolio manager of The Currency Fund (FOREX), a mutual fund holding an ETF-based portfolio. He is also a co-founder of Sarasota Capital Strategies in Osprey, Fla.


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