Emerging Opportunities in Emerging Markets

Portfolio diversification is not a new concept, though it can be a foreign one. By that, I mean that investors like you and me can often reduce our overall equity investing risk by buying into overseas markets.

True, buying into hot overseas bourses can be a bit of a gamble. Dave Mock recently looked at some of the hottest international markets of 2006; the returns may startle you.

Can your portfolio do that? It's not supposed to. An investor should never expect to achieve those scintillating returns on a consistent basis, or even in a single magical year. However, the allure of cashing in on booming economies in developing nations should be a dinner bell ringing in your head, especially if your stocks are too concentrated in a single country or a single sector.

Mania on the cheap
I'm not asking you to chase greatness. I'm only suggesting a way to ride the coattails at a discount. Let's consider the prospects of staking a claim in China, India, and Mexico -- three of the world's most promising markets.

China and India are the world's two most populous nations. Mexico isn't as big, but it's always a popular play given its self-enriching potential.

If you're new to any of those markets, you may feel that the parade has passed you by. All that's left is you and the confetti sweeper. You've seen the massive gains in China in recent years. Barron's Alan Abelson even compared it to Japan in 1989, ultimately arguing that Chinese stocks are "headed for a rude fall. A tumble, we suspect will be greatly exacerbated when its incredible stock market bubble bursts."

The frothiness may not be as thick in India and Mexico, but it's there. If we go by the performance of country-specific exchange-traded funds, you'll see iShares MSCI Mexico Index (AMEX:EWW) -- squeamish ticker symbol and all -- up nearly tenfold since the summer of 1998. Indian shares have been great story stocks, between outsourcing giants and the success of new media specialist Rediff.com (NASDAQ:REDF).

Does these hot markets' promise carry the potential to come undone? You bet. However, there is a way to buy into these countries with double-digit discounts: closed-end funds.

If you've never warmed up to closed-end funds, you're not alone. They aren't as well-known as heavily marketed conventional mutual funds, which don't have a limited number of shares outstanding. They also lack the popular buzz of low-cost ETFs.

Investments that steadily toil away from the mainstream market's spotlight are a good thing for opportunistic Fools like you and me. Witness these country-specific closed-end funds.

What do these numbers mean? Well, shares of China Fund closed at $35.66 on Friday. However, the actual net asset value of the fund's holdings is a whopping $42.96. Investors are paying $0.83 for every dollar of the fund's portfolio.

It's a small world after all
The country-specific discounts don't end there. Closed-end funds dedicated to countries like Ireland, Singapore, and Taiwan are also trading at generous discounts.

Could this possibly mean that developing markets like China and India aren't as frothy as the media would have us believe? If this were a bubble, wouldn't China Fund be bid up as richly as China.com parent CDC (NASDAQ:CHINA)? (Which, by the way, isn't actually bid up as richly as you might expect, since it's still trading in the single digits?)

Remember, of course, that closed-end funds currently trading at a discount can keep right on doing so -- there's no guarantee their market price will ever rise to meet or exceed their NAV. As the saying goes, there is no free lunch. However, there is such a thing as a cheaper lunch -- especially if you've got a taste for foreign cuisine.

If you want to find other promising overseas opportunities on the cheap, check out Motley Fool Global Gains, which circles the globe to help you beat the world's markets. Lead analyst Bill Mann departs for China, India, and Taiwan June 2 in search of new investment opportunities in some of the world's fastest-growing economies. Get updates and analysis live from the field by sending Bill an email at [email protected].

Longtime Fool contributor Rick Munarriz feels that emerging markets still offers great opportunities for growth investors, as long as you're buying into the right ones. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.