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Similar Names, Very Different Portfolios

Gregg Wolper

Years ago, a friend who was an active investor heard good things about the prospects for Chile. He asked if I knew anything about a closed-end portfolio called Chile Fund (CH) (now Aberdeen Chile). I gave him a rundown of its portfolio, expenses, and other traits, some of them appealing, some less so. But those facts didn't hold much interest for him. It appeared that he wanted simply to confirm that the fund existed and was legitimate. The fund's details--necessary information for a fund analyst--were superfluous. If it invested in Chile, it fit the bill.

Although that seemed like a superficial approach, in retrospect he had a point: At that time there was nothing else to choose from. But with the explosion in single-country funds, many of them exchange-traded funds, an investor who now wants to target a specific emerging market (or region) likely has many options. That's especially true with larger markets, but choices are now available even for less-common destinations such as Chile. Often, such funds are far from interchangeable, making investigation critical.

Nevertheless, our observations indicate that many investors don't look as carefully at these funds as they do when choosing most of their other investments. However, they should. Not every fund featuring the right market in its name will do. With country and regional funds, as with any others, it's important that investors know what they're getting.

More Than a Name
India's market has tumbled this year. Through Nov. 11, the funds in the India-equity Morningstar Category had an average year-to-date loss of 17.8%, the worst showing of the 16 international-stock groups, owing to stock-price declines and a falling rupee. (Most other international-stock categories, by contrast, have posted solid gains this year.) Investors looking for an out-of-favor idea at a time when so many markets and sectors have risen sharply might be considering India.

If so, they should examine the options carefully. On the surface, for example, Dreyfus India (DIIAX) and JPMorgan India (JIDAX) might seem equally appropriate; both come from well-established firms and both focus on Indian stocks. Their names are equally bland. Both offer share classes with loads along with no-load institutional shares.

The Dreyfus fund, however, leans toward the smallest part of the Indian market. Although it owns a few recognizable names, its average market capitalization is around the $1 billion mark, and nearly one fourth of its assets are in micro-cap stocks (as classified by Morningstar). By contrast, the JPMorgan fund favors the big names. Its average market cap is about $10 billion, and its top five positions include heavyweights Reliance Industries (RELIANCE) and Infosys (INFY), each of which takes up more than 7% of this fund's assets. Neither of those giants appears anywhere in Dreyfus India's portfolio.

The effect of such differences can be huge. Thus far in 2013, JPMorgan India has lost 14.3%; Dreyfus India has plunged 38.8%.

Of course, one might expect a small-to-mid-cap fund to endure more pain than its large-cap rivals when investment worries abound. But one would have to look below the surface just to know that Dreyfus India has that profile. Moreover, the story doesn't end there; Dreyfus India's smaller-stock orientation doesn't explain why its loss is so much deeper than that of another fund composed mostly of small caps and mid-caps, Wasatch Emerging India (WAINX). The latter fund has declined just 11.2% so far this year despite having a market cap of only $1.7 billion.

Three likely reasons for that performance gap stand out. While Dreyfus India is fully invested, the Wasatch fund holds a cash stake of more than 20% of assets, which has cushioned its fall. In addition, although both funds focus primarily on small and midsize companies, Wasatch India owns far fewer micro-caps. Individual stock choices have made a difference, as well; half of the Dreyfus fund's top 20 holdings have endured double-digit losses so far this year, while none of Wasatch's have.

Meanwhile, investors who want to track an index have their own choices to make. Yes, even index funds targeting the same emerging market aren't interchangeable. Their 2013 performance alone demonstrates that. For example, iShares MSCI India (INDA) is down 13.2% this year, while WisdomTree India Earnings (EPI) has plunged 18.4%. Among other things, their portfolios have quite different market-cap levels, and the current portfolio statistics of the iShares fund shows a more pronounced growth tilt.

Different Angles on Asia
Important distinctions also can appear in funds that target a region rather than a country, even when their names are very similar. So far this year, Putnam Asia Pacific Equity (PAPAX) has lost 1.2%, while BlackRock Pacific (MDPCX) has gained 18.1% and Matthews Asia Growth (MPACX) has climbed 17.4%.

The main difference: Putnam Asia Pacific Equity doesn't invest in Japan, though it did until two years ago. The other funds do buy Japanese stocks, in a big way. BlackRock Pacific has about 44% of assets in Japan, and the Matthews fund has roughly half of its assets there. With Japan having outperformed other Asian markets by tremendous amounts this year, that difference has had a powerful impact.

Details With Consequences
Sometimes, as with Wasatch Emerging India or funds labeled as small-cap offerings, a fund's name will provide a hint of how it differs from rivals investing in the same country or region. But even then, investigation can reveal other differences. And the examples above show that sometimes the names contain no hint at all.

Therefore, in order to know whether a fund offers what they want, investors have to look at details such as performance history in different climates, holdings in the portfolio, overall portfolio statistics and weightings, and fund costs. Among other places, all of this information is easily accessible here on Morningstar.com, without charge. It's worth the effort.

Gregg Wolper does not own shares in any of the securities mentioned above.