Wrong Time to Abandon Emerging Markets?

By Shefali Anand

As emerging-markets stocks lost value in late August, Jamie Jackson, an investment adviser in Chicago, was watching for an opportunity to buy.

“Over the next three years, these markets are going to produce the best returns of any asset class,” says Mr. Jackson, managing principal at investment-advisory firm Stairway Partners LLC.

In the near term, he says, emerging countries face challenges to growth, especially as China’s economy slows down more sharply than people had expected. But even if China’s economy grows at less than 7% a year, emerging-markets securities likely will produce better returns than other investments, Mr. Jackson says.

He didn’t buy during the recent market volatility, but says he will if the broad emerging-markets index falls another 20%. Last year, Stairway boosted the allocation to an emerging-markets fund by two percentage points, to 11%, for clients who can handle moderate risk.

In this column, we feature model portfolios from investment advisers. Stairway Partners, which was founded in 2004, manages around $425 million in assets for wealthy individuals and some pension plans and endowments.

To make investment allocations, the team at Stairway estimates potential returns from various asset classes over a period of three years or longer. If an investment is trading cheaply compared with what the advisers expect it to return, they buy, and vice versa.

Last year, the advisers felt that an index of emerging-markets stocks was cheap compared with expected returns from the underlying stocks, so they added to it. Mr. Jackson says that buying when the markets are volatile, as they have been recently, carries the risk —in Wall Street parlance —of “catching a falling knife,” as prices could keep declining. But he says being too picky about the right entry point could mean missing out on a potential early rally.

Here, Mr. Jackson shares a portfolio suitable for someone who can handle moderate risk. The portfolio gained 8.7% annually over the five years ended June 30. This is after Stairway’s investment-management fee, which is a maximum of 0.75%.

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