Need diversification? How about an emerging markets fund

Look at the performance of emerging markets funds over the last 20 quarters, from Sept. of 1997 through June 2002 and you can see first- hand what zig-zag really means. During 11 of those 20 quarters, the average emerging markets funds' performance was in negative territory, the biggest quarterly dip, down 24 percent during the third quarter of 1998. In the nine gaining quarters, the highest jump was up nearly 37 percent. That was during the last quarter of 1999, according to Lipper. Since then the quarterly beat has been and up and down one.

One fund outperforming the average is the Acadian Emerging Markets fund (866-226-6161). Through July 15, it's year-to-date total return was plus 13.86 percent; in 2001 it ended the year up 9 percent; in 2000, down 30.4 percent; and in 1999, up 62.4 percent.

The fund's been around since 1994 and is team managed. John Chisholm is one of fund's portfolio managers.

"There's no doubt about it, emerging markets have a lot of volatility, " says Chisholm who's been a manager of the fund since its inception. " But right now they're attractive because they've got a great combination of being incredibly cheap and of having much better growth prospects that the U.S. equity market or the European markets do."

Currently , there are about 118 stocks in the Acadian Emerging Markets fund, (AEMGX). Here's more about the fund:

Q: Why has your fund performed so well this year?

Chisholm: We've been able to avoid disasters. We've been able to stay out of Argentina, which of course had a terrible time. We've been about to stay out of Turkey. And, one of the things we look at is the level of risk in the market and we have proprietary ways of trying to measure that risk that's helped us to avoid disasters for the past couple of years.

Q: Tell me about your investment style.

Chisholm: We've a value investment style that is also a multi-factor style. We're not just looking for cheap companies, but companies where we think earnings are going to surprise investors on the up side.

Q: How about some examples currently in the portfolio.

Chisholm: One name in the fund is Lukoil. It's a fairly well-known Russian company that's basically the largest oil company in the Russian market.

A lot of people are afraid of Russia. But from a business perspective, we think Russia is much better now than it was say four or five years ago. Lukoil, for example, is up about 40 percent year-to-date and it's still very cheap when compared to the standards of other oil companies around the world.

The reasons we like it is because it's a very profitable company that's been cutting costs, increasing its earnings and has been adapting Western management techniques.

Another company we like is Arima computer. It's in Taiwan and is basically a technology company. Everybody is down on them but our sense was that the marketplace they are selling into isn't doing as badly as everybody seems to think, that this company is very competitive in terms of its cost structure and has done a very good job of maintaining its margins.

Q: What are the top three holdings in the fund?

Chisholm:Samsung Electronics, Lukoil, and China Mobile Telecom.

Q: Given the volatility of emerging markets funds, what percentage of assets do you think people ought to have invested in them?

Chisholm: It's something that you should take in moderation. It's no place to put all of your money or half of your retirement plan. It's got a place but it's something that you need to control the risk of. So an allocation of say 5 to 10 percent, and probably no more than that for individual investors.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.