Emerging markets have become increasingly popular with investors over the past few years, with success stories coming out of China and Brazil.
Despite investors generally preferring to stick to the UK, emerging markets may be suited to clients who are looking at a long-term investment horizon.
With your clients potentially looking to diversify their portfolios internationally, here are our top tips on what to look out for in the sector.
1. Check out the fund’s strategy. There are numerous ways to access emerging markets. The majority of funds favour a growth strategy while others may be starting to look for income.
2. Look at where the manager allocates to. Some fund managers have a bias to Bric countries, whereas others may look to more volatile and more expensive countries such as frontier markets. The emerging market universe is very broad, so investors need to be sure of where their money is being allocated.
3. Be aware there may be fraudulent companies. Jonathan Pines, portfolio manager of the Hermes Asia ex Japan Equity fund, says while some emerging Asian companies on the outset may look like an attractive investment, you need to look deeper into the accounts. The fund’s team has a strict screening for fraudulent companies. One key aspect of the screen is when management starts to sell shares or does not have a shareholding at all.
4. Look at currency options. Investors can now get exposure to local currencies, which may seem attractive at first but it may not be suited to the more risk-averse investor.
5. Find out the asset classes. Look at what asset classes the manager uses. Some may invest in emerging market debt, which generally carries more volatility and risk, while others may be pure equity or fixed income funds.
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