Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

It's tough to be an emerging-markets fund manager these days. And it's not looking like it will get better anytime soon, at least not before the first quarter is over. For those in doubt, examine the five biggest developing world stock funds in the U.S. by assets.

Combined, Vanguard's FTSE Emerging Markets ETF and Emerging Markets Stock Index Fund, Oppenheimer's Developing Market Fund, American Funds' New World Fund and the iShares MSCI Emerging Markets ETF have lost $34.9 billion of assets under management over the past year, bringing their holdings to multi-year lows. The net asset values of all five touched the lowest in at least five years in January and remain close to that level. They have also had their worst first eight weeks since 2009. 

Grim Beginning
The five biggest emerging markets funds in the U.S. had their worst start to a year since 2009
Source: Bloomberg
* Numbers refer to net asset value changes through Feb. 24

That's on top of last year's performance, which, for the Vanguard FTSE EM ETF, the biggest in its class by assets, was the worst since 2011 based on the fund's price. While some of the others had a worse year in 2011, the prices of four of them fell more than 10 percent. Prices are usually equal to or track the net asset value closely.

Price Pain
Four of the five biggest emerging markets funds dropped by more than 10% last year
Source: Bloomberg

Blame it on the main benchmark for stocks in the developing world, the MSCI Emerging Markets Index, which was down more than 7 percent year-to-date as of Wednesday and is officially in bear territory. Unfortunately, the prospects for the index are hardly looking rosy.

For starters, volatility remains high and is trending up, judging by the Chicago Board Options Exchange's emerging markets exchange-traded fund volatility index. This is the closest proxy for the fear gripping money managers and investors.

Fear Gauge
A measure of emerging markets volatility is trending higher
Sources: Bloomberg; Chicago Board Options Exchange

Then there's China, which is the top holding for the world's largest emerging-market funds, accounting for about a quarter of assets in four of the five. It's also the biggest component of the MSCI Emerging Markets Index, comprising about 20 percent of the gauge.

Three-month implied volatility for the Chinese yuan is at the highest since December 2008 -- a bearish sign for equities. Over the past decade, Chinese stocks consistently dropped when that measure rose.

Currency Concerns
If expected swings in the currency are any measure, there is more pain to come from China
Source: Bloomberg

Sure, the National People's Congress meeting starting March 5 could bring announcements that boost the local market and by extension the MSCI China (which includes Hong Kong-traded Chinese shares, though not those listed in Shanghai or Shenzhen). Still, the chances are that any euphoria will be short-lived. Market sentiment in China remains fragile, as underlined by today's 6.4 percent slump in the Shanghai Composite Index.

Then there's the issue of fundamentals. At 11.3 times, the price-to-earnings ratio of the MSCI Emerging Markets Index is far from its recent lows. The measure was at 10.3 a year ago, and dropped below 9 in September 2011. That's an indication of how low valuations might go should conditions continue to deteriorate.

Finally, there's psychology. After such a horrid 12 months, funds are likely to be protective about their returns in March in order to reduce the pain when they report first-quarter numbers. As Bloomberg News reported on Thursday, hedge funds, for one, are being defensive amid extreme volatility.

It's ugly, it's been scary and it's not getting better yet. This will be a quarter emerging-market stock investors will want to forget.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at

To contact the editor responsible for this story:
Matthew Brooker at