A Safer Way to Invest in Emerging Markets

Why companies like Louis Vuitton and Nestlé can be considered emerging markets investments.

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Louis Vuitton is, in many ways, the quintessential French company. But increasingly, the luxury brand's investors are just as concerned with fashion trends on the streets of Beijing as they are with how many Parisians are toting pricey handbags.

And they're hardly alone. For investors, emerging markets have always represented somewhat of a conundrum: Developing economies offer the chance for rapid growth, but their historical volatility isn't exactly inviting.

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That's where companies like Louis Vuitton come in. Call it investing by proxy. Call it having your cake and eating it too. However you refer to it, though, one thing is clear: After emerging markets' blockbuster returns last year, mutual funds are looking for ways to harness the power of these countries' burgeoning consumer bases without having to accept added risk. One common option is to invest in companies that are housed in the developed world but that depend on emerging markets for large chunks of their sales.

"We do believe strongly that the growth in emerging markets … is very compelling," says Wendy Trevisani, a comanager of Thornburg International Value. "And we can own that through developed-market names, too."

For Trevisani's fund, the tendency to occasionally invest in emerging markets through developed-world names is hardly new. The same goes for a number of other established funds, such as American Funds New World, which counts a number of European companies, including Nestlé, which is based in Switzerland, among its top holdings.

On the other end of the spectrum are newcomers like Amana Developing World, an emerging-markets fund that launched last year. One of its largest positions is in Western Digital, a manufacturer of hard drives based in California. Because the company does quite a bit of production in Thailand, it can readily be considered an emerging-markets investment.

Amana comanager Nicholas Kaiser says the advantage of companies like Western Digital is that they provide access to emerging markets' resources while still having to adhere to the developed world's regulatory standards. "The developed world has higher standards of disclosure and ethics in many of its businesses," he says. "This gives us an extra level of risk protection."