NEW YORK (TheStreet) --- Investors have been pouring into emerging
markets, and emerging-market small-caps have been particularly hot.
During the past year, the MSCI Emerging Markets small-cap index has
returned 26.3%, compared with 14.4% for the *S&P 500*.
Some emerging-markets mutual funds have done better than the
benchmarks. *Wasatch Emerging Markets Small Cap*(WAEMX) returned
41.2%, while *DFA Emerging Markets Small Cap*(DEMSX) returned 30.7%.
Have small-caps become too rich? Maybe not. Small-caps sell with a
price-to-earnings ratio of 12.3, compared with 14 for emerging-market
large-caps, says Laura Geritz, portfolio manager of Wasatch Emerging
Markets Small Cap. The S&P 500 has a P/E of 15.5.
The valuations in the emerging markets are especially intriguing
because in the U.S. small-caps are more expensive than their large-cap
brethren.
Why are emerging-market small-cap stocks so cheap? The emerging
markets are still immature in some ways, says Geritz. Not many
analysts follow small-caps yet. And when U.S. money managers shop in
the emerging markets, they tend to stick with the best-known
blue-chips.
Besides being relatively cheap, the small stocks also offer some of
the most compelling growth prospects in the emerging markets, says
Geritz. She says that the small-cap index is full of the kind of
retail and service businesses that are benefiting from the booming
growth of consumer spending. In contrast, the MSCI Emerging Markets
large-cap benchmark emphasizes banks and energy companies, which are
growing at slower rates.
To try small-caps, consider Wasatch Emerging Markets Small Cap, which
returned 9.7% annually during the past three years, soaring past the
average emerging-markets fund, which lost 2.3%. Wasatch seeks
companies that can grow steadily for the next three to five years.
Typical holdings have secure niches, solid balance sheets and very
high returns on equity. "We want companies that can survive and grow
during periods when the economy turns down," says Geritz.
To limit risk, the fund seeks stocks with P/E multiples that are lower
than the growth rates. Based on next year's earnings, the portfolio
currently has a P/E ratio of 13, a moderate price for companies that
should grow at annual rates of more than 20%.
Source: Thestreet.com
