Global emerging markets funds rocket 150%

Published by Rob Griffin on 24 August 2010.
Last updated on 27 September 2010

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Even the worst performer virtually doubled its money, which is a remarkable achievement and enough to dwarf the meagre 16.9% return of the average fund in the UK All Companies sector over the same period.

So what has been the secret of their success? The main reason is their exposure to countries that have the natural resources needed by the rest of the world, according to Andrew Merricks, head of investments at Skerritt Consultants.

"The money received from selling these commodities has also been seeping out into the rest of the region and helping it develop," he explains. "In addition, these areas don't have the same debt problems developed nations are currently struggling with."

What type of investor are you?

But the sector is certainly not for the faint-hearted. By their very nature these investments will be in relatively unpredictable companies and countries, so the potential for losing money will also be considerably higher.

According to financial adviser Geoff Penrice of Honister Partners, there are two main groups of investors likely to be attracted to such funds: those with a lot of nerve who are willing to ride a rollercoaster in the short run to get high long-term returns; and medium-risk investors who want to have greater diversification in their portfolios.

"I believe that exposure to global emerging markets should be part of a balanced portfolio," he adds. "These funds should provide growth but also reduce overall investment risk by adding greater diversification."

The principle reason people invest in an emerging market stems from a desire to participate in the subsequent growth of that country's economy. High growth generally leads to higher equity market returns over the longer term.

Putting all your eggs in one basket

Of course, you can opt to put all your assets into one specific region or country - such as Latin America or China - but by doing so you will be taking on an even greater level of risk.

One piece of seriously bad news could knock back the regional equity markets and do significant damage to your fund, in the short term at least.

Choosing a global emerging markets fund will lower this risk, although investors must also accept that if China suddenly takes off they are unlikely to see returns as high as someone who had invested in a China-specific fund.

A definition...

To qualify for a berth in the Global Emerging Markets sector, a fund needs to invest at least 80% of its assets in emerging market equities, as defined by the relevant Footsie or MSCI Global Emerging Markets index.

Funds in this sector are broadly diversified across a selection of countries, regions and asset classes, while those that concentrate solely on a single country can normally be found within the IMA's Specialist sector.

They will generally invest in a mix of assets, although oil and gas producers, miners, construction names and telecommunications companies are likely to feature prominently in their lists of stocks.

So how should you choose?

Each of the 40 funds in the sector will take a different approach to the management of assets. Some, for example, will take broader country-specific bets; others will concentrate their efforts on stocks and sectors.

The Aberdeen Emerging Markets fund, for example, clearly believes in diversity, with exposure to 19 countries. Brazil accounts for the largest share (17.1%), followed by China/Hong Kong (13.3%) and India (12.4%).

Which one will suit you depends on your outlook on various areas, so will require a degree of research. Each market should be viewed on its individual merits, as different factors are likely to affect the level of returns they will generate.

For example, a number of observers have questioned whether Chinese economic growth, at 12% a year, is sustainable. If, however, it can confound the sceptics and keep growing at a strong annual rate, investors still stand to benefit.

What's to come

Looking to the future, Andy Gadd, head of research for Lighthouse Group, suggests reasons for feeling optimistic about having exposure to this sector include the fact that the populations of the emerging markets are expected to grow rapidly - and that in many countries there is a growing middle class with money to spend on consumer goods.

"These economies also represent approximately 75% of the world's land mass and are home to more than 80% of the global population," he says. "As well as being less indebted, these emerging economies are rich in resources."

Equities should be viewed as longer-term investments and this is particularly true of emerging markets which are likely to have a rockier ride. However, for those willing to accept higher short-term volatility, this sector could work well as part of a diversified portfolio.

Consider investing in the sector if...

  • You can afford to invest for the long term and don't mind short-term losses;
  • You are prepared to accept higher volatility in the hope of higher returns;
  • And/or you want to diversify your fund portfolio into new geographical areas.

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