Wise Beyond Their Years
Forged by Earlier Crises, Young Emerging Markets Show Signs of Maturity

October 2012

Emerging markets are known for generating the world's fastest economic growth. On a less positive note, they've also acquired a reputation for instability.

According to Christopher Vella, co-portfolio manager of the Northern Multi-Manager Emerging Markets Equity Fund, factors that caused investors to jump in and out of emerging market stocks at the drop of a Malaysian ringgit have improved, especially since the Russian and Asian financial crisis in the late 1990s.

"Many developing countries now have their financial houses in order," he says. "They've learned from past mistakes."

No bubble trouble
Vella cautions against painting all emerging markets with the same broad brush. Overall, however, these are not the emerging economies of yesteryear. Yes, they're still precocious and unpredictable — economic teenagers, if you will. And some still depend heavily on exports to struggling economies in the West.

But the credit bubble that severely damaged rich world finances left sovereign emerging market balance sheets relatively unscathed.

House prices in most developing economies didn't inflate to the same degree as in the United States, Japan or Europe. Since bank bailouts weren't needed, emerging markets are in better financial health than their wheezing developed market elders.

Last year, budget deficits in the emerging world averaged just 2% of Gross Domestic Product (GDP) compared with 8% in developed countries. Similarly, aggregate government debt is manageable, averaging 36% of GDP versus 119% in developed markets.1

Active and passive strategies
Northern offers two distinct strategies to gain exposure to emerging economies.

The Northern Multi-Manager Emerging Markets Equity Fund employs five active managers chosen for their complimentary styles. In seeking the Fund's objective of long-term capital appreciation, the Fund managers also strive to outperform the MSCI Emerging Markets Index benchmark, but with less volatility. Investors seeking to track the MSCI Emerging Markets Index may also choose the Northern Emerging Markets Equity Index Fund — a lower-cost approach that has less risk and less upside potential than the Northern Multi-Manager Emerging Markets Equity Fund.

If the global economy goes off the tracks again, Vella thinks emerging market stocks would take a hard hit along with other risk assets. Some things never change. But assuming a "muddle through" environment, he's generally optimistic on the asset class.

"Selectivity is important, but these are mostly fiscally sound countries with some quality businesses," he says. "If you're a long-term investor, that's a good combination."

1 "Which emerging economies have the most monetary and fiscal wiggle-room?" The Economist. Jan. 28, 2012. Page 75.

Past performance is no guarantee of future results.

Equity Risk: Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.

Emerging and Frontier Markets Risk: Emerging and frontier market investing may be subject to additional economic, political, liquidity and currency risks not associated with more developed countries. Additionally, frontier countries generally have smaller economies or less developed capital markets than traditional emerging markets and, as a result, the risks of investing in emerging market countries are magnified in frontier countries.

Index Fund Risk: The performance of the Fund is expected to be lower than that of the Index because of Fund fees and expenses. It is important to remember that there are risks associated with index investing, including the potential risk of market decline, as well as the risks associated with investing in specific companies.

MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. It is not possible to invest directly in an index.

Gross Domestic Product (GDP) is the market value of the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. GDP includes consumer and government spending, private domestic investments, and net exports of goods and services.

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