Yet, in the year 1999, the average Emerging Market Fund produced 12-month returns of 54.5%. One of the best performing funds in 1999 was the C.I. Emerging Markets Fund, which produced an annual return of 78.9%.

So, we know the emerging market sector is down, just like everything else. But we also know these funds are capable of extreme upside and rebounds. So the question remains – is this the time to buy?

I went to one of the best resources I know, Dr. Nandu Narayanan, Manager of the C.I. Emerging Markets Fund. Dr. Narayanan’s fund has been in the top quartile (25%) of all emerging market managers since January 1997 since taking over the fund. He has managed to outperform when markets are up and minimize losses when markets are down.

The world according to Nandu

“The biggest problem with the emerging markets is the sentiment. Fundamentally, there are many positive issues: Valuations are exceptional, some of the best growth and earnings stories in the world exist in the Emerging Markets and even the liquidity is reasonable,” says Nandu.

However, Dr. Narayanan is still concerned about the technology sector and continues to shy away from geographic centers that may experience a greater impact as a result of the worldwide technology meltdown, “I tend to be shy when it comes to Taiwan and Korea for this reason.”

On the other hand, he is very bullish on what he calls ‘old economy stocks’: “I think old economy stocks still have tremendous value. While the technology story engulfed us, we must remember that we still need clean water, shelter, roads, transportation, and power. Infrastructure stocks have been neglected but now the low multiples are just too attractive to pass up.”

While Dr. Narayanan may sound bullish he emphasizes that caution still exist. The emerging market is an incredibly volatile sector and he is still a little nervous about technology. He is still holding about 20% in cash and will not aggressively invest until he sees a more sustained rally from the old economy stocks. He thinks the technology sector will create some ‘sucker rallies’ which will provide further volatility.

“Emerging Markets are like Roach Hotels . . . “

According to Dr. Narayanan, “the emerging markets are like roach hotels . . . it’s pretty easy to get in but when everyone else is trying to get out and it is near impossible to do so.”

When managing the C.I. Emerging Markets fund, Nandu goes through a three-step process to ensure the highest level of liquidity. Firstly, he looks for political stability. Next, he looks for macroeconomic stability, and finally, he employs individual industry and stock selection. When picking stocks, his key area of concern is size and liquidity which leads him into more of a larger cap focus.

His top-down approach leads him to minimal turnover. Each holding will be greater than 1% of the fund and less than 5% of the fund.

“You can’t eat relative performance”

In the emerging markets, Dr. Narayanan employs what he calls a total return style. He is not concerned about benchmark performance; rather, he is more concerned about absolute performance. He hopes to deliver positive returns when opportunities present themselves but also tries to prevent giving all those returns back when markets retreat. As a result, Nandu is not afraid to hold significant amounts of cash at any given time.

“Where in the world is the best place to invest?”

So I asked the doctor for his best synopsis of which world markets he favors and his favorite three regions in order were Europe, Emerging Markets and Japan. His least favorites were Technology and the US.

My two cents . . .

Just like always, I have to throw in my two cents. The emerging markets are very volatile and should not represent 100% of anybody’s portfolio. I have a tremendous amount of respect and admiration for the level of knowledge of Nandu but use this information with caution.

The emerging markets are not a core holding and you must to do some homework before you jump in with both feet. If the emerging markets fit your risk tolerance, take a good look at the C.I. Emerging Markets Fund. Morningstar gives this fund a 5-star rating and according to our research, the fund beats its peer group 83% of the time with one of the lowest risk ratings in a risky category.