Big stakes in Russia and medium-size companies have sent the usually consistent T. Rowe Price Emerging Markets Stock down 50% over the past year. By Elizabeth Leary, Contributing Editor October 9, 2008 Maybe you read over the past few years that emerging markets had "decoupled." The theory sounds quaintly naive today, but the argument was that stock markets in developing economies had grown strong enough to flourish on their own, without the crutch of a booming, consumption-happy U.S. propping them up.The decoupling theory proved no match for an old platitude: The only thing that goes up in a down market is correlation. After looking as if they might buck the trend for the first seven months of the current bear market, in May emerging markets finally surrendered. Through October 8, the MSCI Emerging Markets index has lost 50% since its 2008 high on May 19, and it's down 50% over the past year. Investors in the T. Rowe Price Emerging Markets Stock fund (symbol PRMSX), a Kiplinger 25 member, are feeling the pain more than most. The fund's 55% loss over the past year puts it in the ninth decile of funds that invest in emerging markets. That's an awfully big loss to stomach. Mark Edwards, who runs the fund alongside lead manager Chris Alderson and two associates, says the high-growth, medium-size companies the team favors have been doubly pummeled as investors have fled to quality among boring-but-reliable blue-chip types. He also says the fund's larger-than-average 15% stake in Russia, where stocks have fallen 68% year-to-date, accounts for some of its larger-than-average losses. Advertisement Such performance is an exception for this usually consistent fund. It beat the MSCI benchmark in eight of the past ten calendar years and lagged the index by only one percentage point in each of the other two years. Volatility like this is a good reminder of why -- even in the best of times -- emerging markets should make up a small portion of your portfolio. Volatility works on the downside as well as the upside, after all. But it is quite noteworthy that over the past ten years, this fund has returned an annualized 13% despite the drubbing it has taken during the past year. The lesson here is that you should approach emerging-market funds with a very long-term perspective. Edwards says the stocks he follows are now cheaper than they were at the lowest points of the Asian financial crisis in the 1990s, even though the fundamentals of these economies are vastly stronger today. He likes the BRIC countries -- Brazil, Russia, India and China -- which all have big financial reserves, more than Eastern European countries and South Africa, where financial health is less reassuring. And he's optimistic that as inflation slows in China and India, interest rates will fall back to earth, easing access to capital. Advertisement Despite the beating the fund has taken, Edwards is upbeat on Russian stocks. "The price of oil could go below $50, and the Russian energy story would still be a very strong one," he says. He notes that Gazprom, the government-controlled energy giant, currently trades for just three times earnings over the next 12 months. Edwards says he doesn't see emerging-markets stocks staging a recovery until markets all over the world move beyond their present panic. An immense amount of foreign money has flowed out of these stocks and won't return until investors regain their appetite for risk. But, he says, "Once the dust settles from this turbulence, you'll look back and say 'Wow, that was extremely good value.' "