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A solid outperformance by emerging-market funds in the first half of this year suggests a new investment cycle is under way. Fund managers report that cash levels have been reduced and fresh money is seeping back into funds for allocation to emerging markets. And while several new vehicles have recently been launched, pools of capital from institutional clients are being formed in segregated accounts for investing in emerging markets.

Emerging markets were up by about 34% in the year to late June, as measured by the IFCI Composite Index. And barring interest-rate uncertainty and a slowing of growth in developed markets, the pace is expected to continue.

Strategist Robert Pelosky, with Morgan Stanley Dean Witter in New York, is convinced the asset class has entered a new multiyear investment cycle that could take the MSCI EMF Index all the way to 700, well beyond its all-time high of 580 set in 1994. While the flow of money into emerging markets funds has thus far not been explosive, the inflows appear to be gathering steam.


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