The Investment Management Association (IMA), trade body for the UK’s £3000bn asset management industry defines funds that qualify for the Global Emerging Markets Sector as:
‘Funds which invest 80% or more of their assets in emerging market equities as defined by the relevant FTSE or MSCI Global Emerging Markets index’
This definition of course relates to equity based funds. There are some funds that specialize in fixed interest investment, and these can be found in the Global Bond sector.
Are all Emerging Markets funds broadly the same ?
The IMA Global Emerging Markets sector lists more than 30 funds. These are all generalist funds which in theory can invest in any emerging market across the globe. There are some different approaches, for instance one fund concentrates on investing in large cap companies, whereas another is playing the theme of investing in infrastructure. Broadly though, it is reasonable to compare these funds against each other in order to make a selection.
There are more focused emerging markets funds, but these tend to be found in the IMA Specialist Sector which features regionally focused funds such as Latin America, Emerging Europe and the Indian sub-continent. Perhaps the most popular area over the last couple of years, China, can be found in the Far East Excluding Japan sector.
Most of what we have covered here deals directly with the fortunes of emerging markets companies. There is a category of funds which invests in fixed interest stock and is more about interest rates and the ability of the companies to and/or governments to pay back their borrowings. These funds can be found in the IMA Global Bond Sector.
As with the equity funds, the bond funds also add to the diversification of a portfolio. The risk/reward profile of these funds are also similar to that of the equity funds in that rewards can be greater than those of the mature economies, but the downside can be greater also.
How can I invest ?
Most Fund Managers encourage direct investment through their Broker Dealing and Adviser Support services but retail GEM Funds are available through mainstream Platforms and Fund Supermarkets.
Financial Advisers will also be able to blend exposure to Emerging Market Funds into ISA, SIPP and Unit Linked Bond investments as a tax efficient way to generate exposure to Emerging Market returns.
Will Emerging Markets Demand continue through 2010 ?
Of course no-one can say for certain whether demand for emerging markets investment will continue its momentum through 2010, but there is evidence that there is secular change occurring in this investment area, particularly amongst the larger emerging markets.
The wider perception of the economic landscape and the actuality of the recessionary pressures that the Credit Crunch created across the world has meant that investors are more aware of the need for stable fiscal and monetary governance across the world. The more developed economies in the GEM sector are now seen to be governed in a more responsible, less corrupt fashion than was the case even 10 years ago. The economies themselves have also seen the dire consequences of short-termism in economic activities and the likes of Russia, Brazil, China and India see the need and responsibility to govern for longer term stability and wealth.
These changing attitudes have increased the confidence of investors, and this coupled with poor forecasts of growth in developed nations has pointed many investors towards emerging markets such as China and India, where growth forecasts over the longer term are still double digit.
Similarly, the risk of default in the bond markets in these regions is not as high as even 10 years ago, and the rewards in terms of dividend yield are attractive, being upwards of 7%. Compare this to rates available in the developed nations.
For both equity and bond funds, currencies can be an added factor either adding to or detracting from returns.
Even within the Emerging Markets arena diversification can be achieved. From the bigger emerging markets such as the BRIC economies of Brazil, Russia, India and China through the Middle East and North Africa to the developing European Nations such as Bulgaria, Ukraine and Estonia.
Defaqto has been aware of the need for alternative investment options in the research requests from advisers eager to compete for client monies with a more modern approach to asset allocation than the equity, bond, property and cash story of the developed economies. Absolute Return Funds have done well by offering a Cash-Plus return outside the Equity/Bond mix and GEM Fund might be seen in a similar light.
Certainly leading proponents of Emerging market investment push the view that, in order to have a balanced portfolio, that meets the income and growth targets set before the credit crunch, over the medium to long term, all retail investors will have to accept a proportion of their funds sitting in developing economy assets, and we would not disagree with this.
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