Emerging-markets stocks were beginning to recover in late 2019, thanks to a trade agreement between China and the U.S., when the pandemic upended everything. During the ensuing stock market sell-off, the MSCI Emerging Markets index fell 31%. Baron Emerging Markets (symbol BEXFX), a member of the Kiplinger 25, our list of favorite no-load mutual funds, lost 34%. No matter. Its recovery has been spectacular. The fund’s one-year return through mid August beat the index by more than three percentage points.
During the sell-off, manager Michael Kass sorted the fund’s portfolio into three groups: firms perceived to be beneficiaries of the disruption from COVID-19; firms that were adversely affected but would likely survive; and businesses likely to be “impaired” long term.
Then Kass added to holdings that were temporarily impacted, such as Reliance Industries, an Indian conglomerate that has become a dominant internet services provider, and Kingsoft, a Chinese cloud services and software company. He also beefed up or acquired stakes in firms deemed to be long-term COVID beneficiaries, including Brazilian digital payments providers PagSeguro and StoneCo. Many of these stocks have more than doubled since the sell-off.
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Kass sold shares, too, including his entire stake in three airlines. A full recovery in airline travel could take three to five years, he says. “In a recession, a 10% decline in revenue is huge. These companies saw a 90% decline.”
Few expected a post-COVID rally in emerging-markets stocks, in part because of a belief that developing countries wouldn’t cope well with the pandemic. But Kass says stock markets in China, Korea and Taiwan “have performed the best coming out of the crisis because they efficiently managed” the virus.
Kass zeroes in on opportunities in growth-oriented themes such as e-commerce and digital payments, or local Chinese companies focusing on robotics and biotechnology, to name a few. Then he and his analysts do down-and-dirty research to pick stocks. Over the past five years, the formula has delivered a 6.9% annualized return, which beat both the MSCI EM index and the average diversified emerging-markets stock fund.
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