The link between risk and reward in stocks is breaking down as emerging markets post the worst first quarter since 2008 and lag behind shares of developed economies by the most in 15 years.

The MSCI Emerging Markets Index’s 3.8 percent drop this year through last week trimmed its rebound from an October 2011 low to 22 percent. That compares with a 33 percent advance for the MSCI World Index and marks the first time since 1998 that developing-country shares have underperformed during a global rally. When adjusted for price swings, emerging market returns are 37 percent smaller than in advanced nations, data compiled by Bloomberg show.

While higher volatility in developing countries led to outsized gains during the last six bull markets, this time is proving different as government intervention curbs profits at companies such as PetroChina Co. and Light SA and growth slows from South Korea to Poland. Bulls say emerging markets will lead the next stage of the global rally as record low interest rates send investors into riskier securities. Pessimists say the trend will continue as investors favor more transparent markets.

“The old rules of thumb may need to be questioned,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., which oversees about $661 billion, said in a phone interview. “It is surprising to many investors that emerging markets haven’t participated in the rally.”

Correlation Drops

Money managers surveyed by Bank of America Corp. cut developing-nation shares in March for the first time in six months while boosting positions in the U.S. to the highest level since July, Michael Hartnett, the bank’s chief investment strategist in New York, wrote in a March 19 report. Morgan Stanley, owner of the world’s largest brokerage, reduced its estimate for gains in emerging-market equities on March 18 while boosting its projections for U.S. and Japanese shares.

MSCI’s emerging index rose 0.6 percent at 4 p.m. in New York, after falling 2.6 percent last week. The MSCI World Index fell 0.4 percent to 1,426.61 after a 0.8 percent decline last week. The Standard & Poor’s 500 Index slid 0.3 percent to 1,551.69.

The 120-day correlation between the two MSCI gauges fell to an eight-year low of 0.54 on March 14. A reading of 1 shows lockstep moves, while minus 1 means opposite directions.

Asian Crisis

Investors willing to endure bigger price swings in developing nations have usually been rewarded during global stock rallies. Emerging shares beat developed equities by an average 46 percentage points during bull markets -- defined as a gain of at least 20 percent in the MSCI All-Country World Index from a recent low without a decline of the same magnitude -- since the index data began in 1988.