Without any question, "emerging markets" funds are the newest, hottest, trendiest thing in mutual funds these days.
But there are plenty of questions about how long these funds are going to stay hot and trendy, and what might happen to cool them down.As a group, emerging markets funds are so new that the big fund tracking services haven't yet had time to create a category for them separate from the broad classification of international or global stock funds.
But emerging markets funds, which seek out opportunities in small, just-developing countries or nations where capitalism has just been introduced, have done much lately to distinguish themselves from the rest of the pack.
Some of the biggest, including Templeton Developing Markets, Fidelity Emerging Markets and Montgomery Emerging Markets, last year racked up returns in the 55 percent to 85 percent range.
That put them on the leading edge of a general surge in all types of international funds, which averaged a return of just under 40 percent in the Lipper Analytical Services rankings.
"It was an amazing year," said Dan Duane, managing director of global equity funds at Prudential Securities Inc. "I've been doing this outside the United States since 1984 and I've never seen a year like this one."
What worries many fund observers, however, is that these dazzling performance numbers will attract - and maybe are already attracting - investors who don't stop long enough to study the special hazards of these markets.
Emerging markets in remote corners of the world may indeed be full of bright promise that is hard to find in more mature economies like the United States or the other big industrial powers.
But they also present much greater political risks, along with the other perils of any sort of frontier boom town. For one thing, the liquidity that people take for granted in longer-established financial markets may simply not exist in fledgling financial centers when a crisis strikes.
"In a heartbeat, emerging markets could be down 30 percent," says Steve Janachowski of Brouwer & Janachowski, a San Francisco firm that manages money using no-load mutual funds.
"A lot of these funds don't have a track record or seasoned managers," Janachowski says. "Also, they've got nowhere else to go when these markets get overheated."
People who manage these funds say they bring a great deal of expertise and hard work to their jobs.
Far from dabbling in these markets by phone, fax and cable, they say, they log prodigious air miles investigating companies and marketplaces first hand, often in places where American-style money management has scarcely ever been tried before.
Furthermore, they say, they are not investing in some story concocted just to serve the American mutual fund market.
Big things are happening in places ranging from China to Latin America, they declare, and the only real choice facing American investors is whether to ignore these developments or participate in them.
On balance, it appears that the advisable course for a would-be investor in emerging markets funds is to practice moderation, and to take a long-term view.
In the current words of the United Mutual Fund Selector advisory about foreign funds in general: "Admittedly, foreign funds are more volatile than their U.S. competitors, but foreign funds should only represent a small portion of your portfolio.
"Diversifying into foreign mutuals is designed to decrease your overall risk because most foreign markets are not highly correlated with the U.S. market.
"We would not run from foreign mutuals at this juncture. There is the possibility of net asset value slippage in the short run, but keeping a modest portion of your assets in these funds should not only spread your risk, but also prove profitable over time."