Emerging-Market Pros Sharpen Their Focus

Conventional wisdom says investors should always diversify, especially when it comes to volatile emerging markets. But now, in the face of some recent run-ups overseas, many investing pros are doing just the opposite -- pushing client money into single-country bets.

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After taking a drubbing last year, emerging-market funds, which invest in developing capital markets across the globe, have come roaring back. The average diversified fund has gained 13% this year. But the stock markets of some individual countries have jumped even higher. Russia and Brazil have each gained 19%, while India has risen 29% and Egypt a whopping 37%, according to data from index-compiler MSCI.

Given the outperformance, even some of the most ardent believers in diversification are targeting certain regions or countries, including advisers at Bank of America Merrill Lynch and Wells Fargo.

"We're certainly looking at the country first, and making more country calls and fewer sector ones," says Kate Moore, senior global equity strategist at Bank of America Merrill Lynch Global Research.

Not everyone agrees on which countries are set to take off.

Ethan Anderson, an independent planner in Grand Rapids, Mich., whose firm manages $1.5 billion, is buying exchange-traded funds to get clients direct exposure to Korea and Malaysia. Greg Peterson in Waltham, Mass., whose firm manages $3.5 billion in assets, is considering increasing client allocations to single-country funds focused on China and India.

Since Jan. 1, investors have poured more than $530 million into China region funds, after yanking $3 billion from them in 2011, according to fund tracker Lipper. Similarly, investors have added $160 million to India-only funds this year after pulling $70 million last year.

To be sure, many investing pros still recommend individual investors spread their bets, pointing out those who bet the house on hot performers often end up losing. This is especially true with emerging markets, which move faster than the U.S. and often go down just as quickly as they went up, says Alec Young, global equity strategist with S&P Capital IQ. "It's always tempting for investors to try to be selective," says Mr. Young. "But there is less risk in diversification."

Nevertheless, some advisers and planners say putting more chips in fewer pots is the right strategy now. For one, they argue that, while they expect emerging-markets growth to outpace the U.S.'s in 2012, not all countries are expected to emerge so quickly from the global downturn. India's economy, for instance, is expected to grow 7% this year -- double that of Mexico, according to the International Monetary Fund. China is expected to grow more than 8%, compared with just 3% for Brazil.

And they argue that the lingering European debt crisis has made emerging markets relatively less risky than in the past. Compared with the developed countries of the West, many emerging nations carry little debt, and are therefore viewed as better prepared to handle economic head winds such as inflation or a sudden slowdown in growth.

"Before, you could pretty much set it and forget it," says Brian Jacobsen, portfolio strategist for Wells Fargo Funds Management. "But, in this environment, some countries are going to do better than others."