One of the typical arguments for diversification into emerging market equities is that they have a low correlation with the developed markets. From a portfolio perspective this is clearly an attractive attribute. The case for “radical diversification” rests on the existence of asset classes that do not perform in line with the developed markets.
The hottest segment of the emerging markets has been BRIC funds (short for Brazil, Russia, India and China). The large, liquid and fast growing nature of these markets lead to strong performance leading up to the most recent emerging markets correction. In the past we have noted that the BRIC phenomenon was primarily marketing driven. For most investors broad-based emerging market exposure is probably more appropriate.
Since these markets became the darlings of the fast money set, like hedge funds, their returns have become more correlated with the rest of the world. This clearly lessens their diversification benefits. According to dailyii.com a mutual fund company has created an emerging market equity fund with this problem in mind.
They report that Eaton Vance has a fund that is designed to be less correlated with the rest of the world. By emphasizing smaller countries they believe they can generate both competitive returns and a better portfolio diversifier.
While we do not endorse this fund, or any specific fund, it is an intriguing concept. The only question is whether the ancillary portfolio goal, i.e. lower correlations, will harm the generation of returns. While the answer to that question is unclear, it is interesting to see firms focus on products that aid in the process of broad-based diversification.