Investors wooed by Japan and emerging markets story

Actively managed funds are the more traditional way to get exposure to the emerging market countries. But the BlackRock ETP Landscape report for August 2014 reports that investors upped their allocations to emerging markets and Asia equities, citing the search for relative value.

It reveals that emerging market equity ETPs saw their fifth consecutive month of inflows, with $4.7bn (£2.9bn) focused in broad emerging market and China funds, while according to BlackRock, Asia added another $3.4bn, led by Japan.

Dan Attwood, proposition manager for retail index funds at Legal & General Investments, says: “I think the overriding argument has always been that index investments and passives only work in efficient markets and that’s definitely not true. I think index investing in emerging markets brings a number of benefits.”

He cites the lower fees associated with passive strategies, which he notes can have a considerable impact on long-term returns.

Mr Attwood points out: “Whereas in an active fund there is a risk of perhaps having certain biases within the fund, where the expertise in the fund management team is focused on particular regions or industry sectors, with an emerging market equity index fund what you’re doing is just buying that whole market.”

For Ursula Marchioni, head of ETP research EMEA at iShares, the growth in the number of products that investors can access to gain exposure to emerging markets is linked to an increase in investor appetite for index investing as a whole.

Ms Marchioni says: “If you look at the US retail marketplace, approximately 25 per cent of the overall assets are now in index solutions, [whereas] 10 years ago at the end of 2004 I think it was 12.5 per cent. In Europe we are now where the US was 10 years ago. So it is an exciting space.

“I think a very interesting angle for passive investing in EM equities is also related to the fact that these markets are undeniably less liquid and more expensive to trade than developed markets.

“They are a very efficient way to minimise trading costs for markets where trading costs can be high due to inherent liquidity.”

At a time when investors are increasingly conscious of costs and fees, emerging market passive products could win out over their active counterparts.

Ellie Duncan is deputy features editor at Investment Adviser

Key facts

• 25% – the percentage of the overall assets in the US retail marketplace that are in index solutions

• $23.3bn – the total flows into global ETPs in August this year

• $4.7bn – inflows into emerging market and China equity ETPs in August 2014