Heikenfeld invests in companies with high margins and projected strong sales and earnings growth potential. Her holdings sell unique products, like dental insurance in Latin America, funeral insurance in Africa and innovative drug delivery systems that help cancer treatment. Over the long term, she believes these companies could return 15% annually, though it will be a bumpy ride.

“The fund invests in companies with innovative products, brands, business models and other strategic differentiators that establish an entirely new market or result in rapid share gains,” she adds. “We believe certain companies will be responsible for the next wave of growth in emerging markets.”

Meanwhile, the large-cap companies in the Oppenheimer Developing Markets Fund are good buys in the midst of geopolitical crises. Valuations tend to rebound after bad news abates. Companies in Asia, Europe and the Americas make up 80% of the fund’s holdings. The largest holdings include Tencent Holdings Limited, a Chinese social networking company; Housing Development Finance Corp., a major India housing lender; and Yandex, Russia’s No. 1 search engine.

Historically, hot money moves in and out of the emerging markets. But research shows clients should accept the short-term losses in return for longer-term gains. A 2003 study by Yale professor Lingfeng Li reveals that investors enjoy substantial diversification benefits by adding emerging market securities to a portfolio of stocks and bonds from the United States, the United Kingdom, France, Germany, Japan, Canada and Italy.

Over the short term, however, the emerging market volatility and correlations with the major markets, like the United States and euro zone, can reduce the benefits of diversification just when investors need the protection. This has happened several times over the last 10 years, according to a study by MSCI Barra.

With emerging markets, accounting problems lurk under the surface. Portfolio managers tend to stick with companies that adhere to the International Accounting Standards Board rules, Hong Kong reporting rules or U.S. rules that cover dollar-denominated securities. Chinese companies, however, have a reputation for cooking their books. Chinese banks underreport nonperforming loans. Heikenfeld, of Oppenheimer, is suspicious of companies that project high earnings growth but don’t have the infrastructure or margins to back up their estimates. And Ruff, of Forward Emerging Markets, backs away from companies that only adhere to a country’s generally accepted accounting standards.

Meanwhile, a study by Aswath Damodaran, a professor at NYU Stern School of Business, says emerging market valuations fail to sufficiently consider country risk, a lack of transparency in these companies or their corporate governance.

Investment-grade emerging market bonds are issued without covenants or collateral, despite the fact that their cash flow to meet annual interest and principal payments typically exceeds the cash flow of their U.S. counterparts. Also, emerging market bankruptcy laws are weak, says Fitch Ratings. This doesn’t bode well for either stock or bond investors.

“Emerging markets continue to present incremental risk to fixed-income investors,” says Daniel Kastholm, a managing director at Fitch based in Chicago. “There is still a limited track record [of improved bankruptcy laws] and the results are not good.”