Country Fund

What Is a Country Fund?

A country fund is a mutual fund that invests only in the securities of companies in one country. Though able to invest in a variety of sectors, country funds are considered to be greatly exposed to political risk without being able to diversify that risk away.

Understanding a Country Fund

A country fund will invest all or a majority of its assets into the securities of one country. Most country funds do have a small percentage of investments in other countries but are highly concentrated in their country of choice.

A country fund for Russia, for example, will only invest in assets based in that country, such as the stocks of Russian companies, Russian government debt, and other Russian-based financial instruments.

Country funds can demonstrate fantastic results because of their concentrated holdings; however, along with this type of performance also comes a high level of risk and price volatility. This is particularly the case for country funds focused on developing countries, which are usually categorized as emerging markets.

In emerging markets, a fund's portfolio may be concentrated in a small number of issues with very low market liquidity, making it difficult for the fund to exit positions if need be. A country fund will also be exposed to the political risk of any country, particularly so if the country has demonstrated a history of instability.

Even in developed markets like Europe, putting investment funds in a single-country fund means that you are subjecting your risk-return expectations to a relatively narrow market environment. It is generally understood that diversification is one of the most prudent investment strategies, in which investing in a country fund diminishes. It is for such a reason that investment experts suggest not to have an entire investment portfolio in only one country fund.

Global Fund vs. Country Fund

Country funds and global funds can both be used to add geographic diversification to a portfolio. A global fund is a fund that invests in companies located anywhere in the world, including the investor’s own country. They often seek to identify the best investments from a global universe of securities, regardless of where that security is based.

As such, a global fund provides investors with a diversified portfolio of global investments that reduces their risk exposure. Investing in international securities can often increase an investor’s potential return with only a small amount of additional risk. A global fund can also help to mitigate some of the fears investors may have when considering international investments through its diversified portfolio structure.

An investor could, in theory, construct a geographically diverse portfolio using individual country funds. This would require a great deal of research and effort and could be accomplished simply by selecting a global fund. However, country funds can easily be used to supplement a global portfolio and concentrate a bet on a region, in effect overweighting a single country, while the global fund maintains diversification.

Real-World Example

The Voya Russia A fund seeks long-term capital appreciation by investing in the stocks of Russian companies. The fund invests at least 80% of its assets in equity securities of Russian companies with small holdings in other countries, such as the U.S. and Kazakhstan.

It had $69.5 million in assets under management (AUM) as of June 30, 2020. It has a five-year annualized return of 8.58% and a 10-year annualized return of 2.52%. It is an expensive fund with a net expense ratio of 2.01%.

The company invests 50% of its portfolio in materials and energy, with its top holdings being MMC Norilsk, Yandex NV, EPAM Systems Inc, and X5 Retail Group.