Investments  

Insight: Global Emerging Markets

Insight: Global Emerging Markets

Diversification is one of the most important aspects of choosing which assets to include in a portfolio. Spreading allocation across a broad spectrum of funds helps to mitigate the risk of losing a significant amount of money if something were to go wrong in a particular sector.

Advisers often tell their clients to invest in what they know, leading many to allocate their funds primarily to domestic, familiar markets. However, the performance of emerging markets often differs greatly from that of developed markets, helping to create a broadly spread portfolio.

Emerging markets are classified by the World Bank as a country with low-to-middle per capita income. For the current 2015 fiscal year, the World Bank defines low-income economies as those with a gross national income (GNI) per capita of $1,045 or less in 2013, and middle income to be those with a GNI per capita of more than $1,045 but less than $12,746. Countries under this classification include China, India, the Philippines, and Latin American countries.

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The funds that make emerging markets their investment objective may be regionally specific – such as Latin American or Asia Pacific excluding Japan – or can encompass all types of emerging market countries into one.

Unit trusts

The best way to access emerging markets is probably through a unit trust or an investment trust. Table 1 looks at the top performing emerging market funds and investment trusts.

Templeton’s Emerging Markets Smaller Companies fund takes top spot as the best performing unit trust as of 1 February. Launched in 2007, the £224m fund charges an entry fee of 5.75 per cent and an ongoing charge of 2.5 per cent

Equity securities issued by smaller companies, typically valued at around $2bn USD in market capitalisation, are the focus of this fund. These companies must be located in, or do significant business in, emerging markets.

The fund also broadens its scope to include, albeit to a lesser extent, equity and equity-related securities, such as participatory notes, issued by companies of any size located in any country. Debt securities of any quality, including lower quality debt such as non-investment grade securities, issued by companies and governments in any country, are also on the radar of Templeton’s investment managers.

Investment trusts

Investments trusts can be a better vehicle for emerging markets than unit trusts. If shareholders feel nervous about the market and sell their shares in the trust, investment trusts can still hold on to their investments. Unit trusts, on the other hand, may be forced to sell some of their holdings in this scenario in order to pay exiting investors.

BlackRock Frontiers, launched in 2010, is the best performing investment trust. The £174m fund, managed by Sam Vecht and Emily Fletcher, charges an annual management fee of 1.1 per cent of total assets, an ongoing charge of 1.45 per cent, and a performance fee of 10 per cent of any net asset value (NAV) outperformance of the MSCI Frontier Markets Index.

The Frontiers fund invests primarily in equities with some cash alternatives and derivatives. Kuwait, Pakistan and Bangladesh are the largest regional focuses of this fund, with some allocation also given to Sri Lanka, Romania, Kazakhstan, Morocco, Argentina and Ukraine.