Favourite emerging market funds
Emerging markets funds have had a fantastic run over the past year - the Investment Management Association (IMA) global emerging markets sector gained more than 70% over the year to 1 December, with the top-performing funds up by more than 100%.
The rationale behind the ongoing emerging markets success story revolves around the massive industrial revolution taking place, which is further fuelled by young, growing populations keen to become consumers.
China, for example, reports growth rates of almost 9% for 2009 at a time when the UK is still mired in recession and the US economy is only just emerging from it.
Indeed, emerging markets now account for about a third of global GDP, yet only about 10% of world stockmarket capitalisation, according to Peter Lucas at RBC Wealth Management.
And that translates into what's increasingly being viewed as under-exposure for most private investors, with many financial advisers now recommending that clients increase the proportion of emerging markets funds in their portfolios.
Last year, we grouped emerging markets and specialist funds together, which may explain why only one of last year's recommendations reappears in this year's emerging markets list: Neptune Russia & Greater Russia.
Of the others in last year's list, Lazard Emerging Markets is up 68% over the year, marginally outperforming the global emerging markets sector average.
The other two are more focused funds. Fidelity South East Asia, which has done even better, is up 72% against the IMA Asia excluding Japan sector average of 66%. In addition, the iShares Brazil ETF has risen more than 100% over the year.
This year, the focus has shifted slightly towards regional and global emerging market funds, although we do have another specialist fund choice, this time focusing on the potential offered by India.
Aberdeen Emerging Markets
This is widely recognised by advisers as being one of the strongest runners in the emerging markets arena, with consistently impressive performance over recent months and several years.
Peter McGahan of Worldwide Financial Planning regards Aberdeen's offering, run by Devan Kaloo, as "an outstanding fund", with risk reduced by intensive research. Indeed, he stresses that research is the key to strong performance in this sector.
"While companies in the UK are reasonably well understood, sector conditions in emerging markets are very different and losses due to inappropriate or incorrect data are common" he explains.
"Aberdeen has a 31-strong emerging markets team, split into regional specialists based in Singapore, Hong Kong, Bangkok and Kuala Lumpur. At team meetings all this company level research is assessed, focusing on the quality of management, financial position, treatment of shareholders and growth prospects."
The fund is also a favourite of Christine Morris, director of Informed Choice, for its consistently strong exposure to these growth markets.
First State Global Emerging Market Leaders
It may not have the snappiest title and it has underperformed the sector over the past year, but this fund is another highly regarded offering, as First State, like Aberdeen, has built a strong reputation in emerging market investment.
As Steve Laird at Carrington explains: "Emerging economies are probably the least efficient of all markets so you want a good manager to get you some 'alpha'. Angus Tulloch, who manages this fund, is that man - he delivers high returns for relatively low risk."
Ben Yearsley at Hargreaves Lansdown agrees: "For most people who want emerging market exposure, this fund is probably ideal," he says.
"It's similar to First State's Asia Pacific Leaders fund, in that Tulloch invests in long-term companies with good cash flow, good management and good balance sheets. Within this relatively high-risk sector, this should be a core holding."
Neptune Russia & Greater Russia
This specialist fund is not one for widows or orphans, or indeed anyone likely to lie awake at night wondering if their money is still safe.
Currently ranked eighth out of 84 funds in the IMA specialist sector, it has risen in value by almost 100% in the 12 months to 1 December 2009, having lost more than 55% over the previous 12-month period, and there's bound to be more high drama to come.
Nonetheless, Yearsley rates it highly. For a start, he points out: "Manager Robin Geffen and the Neptune team have been the darlings of the industry for a few years now, with top-performing funds in many different sectors.
"They generally analyse stocks on a global sector basis, which allows them to easily compare companies across the globe."
He particularly likes Russia as an investment proposition, as it combines commodities (it has huge oil, gas and gold reserves) and a burgeoning consumer story.
"It is one of the cheapest of the emerging markets, with some of the most interesting companies and huge reserves, and also probably one of the highest levels of political risk," he observes.
Raj Shah at Blue Wealth also nominates the Russia story, accessed through this fund, as one of the best emerging market options.
"Significant trade deals have seen an economic relationship develop between Russia and many countries, particularly China, which is proving to be a substantial consumer of Russia's enormous natural resources. So China's growth is very positive for Russia," he observes.
India is a favourite of Christine Morris: "There has been massive urbanisation, people have money to spend and this can be sustained. Goods, especially consumer goods, have continued to be exported, with only luxury goods such as jewellery being adversely affected by the global slowdown."
Ben Yearsley also sees enormous potential. "India is a huge market with approximately 9,000 quoted companies, and Jupiter manager Avinash Vazirani is looking for those prospering companies that have been overlooked and under-researched," he says. "It's an excellent stockpicker's market.
"Another plus is the fact that India has a burgeoning middle class, where many speak English, making it a very interesting long-term investment opportunity."
Yearsley points out that Vazirani has been managing Asian and Indian money for almost 15 years, although the Jupiter fund was only launched in 2008. "He effectively reversed his own company and fund into Jupiter," he adds.
Gordon Bowden of Quainton Hills Financial Planning is equally excited about opportunities in India, but prefers First State's Indian Subcontinent.
"For those happy to ride the volatility rollercoaster, India is the place to be," he comments. "First State has a good reputation for its general emerging market funds. "This is not one for your grandmother, but as India becomes a dominant economy the rewards could be huge."
First State Asia Pacific Leaders
The strength of this investment house in the emerging market arena is underscored by the range of First State funds that are nominated in this category.
The Asia Pacific offering is picked by Robin Keyte at Towers of Taunton, on the basis of its AAA ratings from Standard & Poor's and Old Broad Street Research, its low total expense ratio for an emerging markets fund (just 1.58%), and the fact that First State practises responsible share ownership, liaising with the companies in which it invests to try and bring about improvements in issues such as governance and corporate social responsibility.
Managed by the veteran Asian expert Angus Tulloch, the fund covers a mix of developed and emerging economies, including Australia, Hong Kong, Taiwan and India.
It underperformed the sector in 2009 (despite returning more than 50%), reflecting Tulloch's generally defensive investment stance, but that bias should stand the fund in good stead if markets weaken following last year's rally.
This article was originally published in Money Observer - Moneywise's sister publication - in February 2010
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.