While some experts suggest tapping in to emerging markets through western multinationals, the more direct route into this seemingly unstoppable growth story is a global emerging markets fund – investing across Asia, Latin America and elsewhere.
Two funds favoured by a number of investment advisers are managed by First State and Aberdeen.
“They’ve good teams that have been running money for years,” says Mark Dampier, head of research at advisers Hargreaves Lansdown. “They are also more value-oriented. The danger with some managers is they get over-excited.”
The attraction of a global fund is its flexibility to take advantage of a range of opportunities rather than being restricted to specific markets. Many advisers also favour funds that can invest in a relatively unconstrained way relative to stock market index weightings.
Dampier notes that while about half the Russian stock market is made up of energy and oil companies, “the Russian story is really consumer, but those companies are underweighted in the index”.
Marcel Porcheron, research analyst at Bestinvest, likes funds that can “allocate aggressively”. “We would argue that emerging markets present opportunities for good, fundamentals-based managers to outperform because the markets are less mature and more inefficient.”
Mick Gilligan, director of fund research at Killik & Co, recommends City of London Emerging World, a fund of investment trusts and closed-ended funds. This structure makes it easier to invest in more exotic markets such as Kazakhstan, he says.
Experts say that investing in single-country funds can also make sense where markets are larger and more diversified – China, India and Russia, for example. However, warns Dampier: “The danger is you buy when the market has already done well and the manager has nowhere to go if it falls.”
A single emerging market is inevitably riskier, and investors here may be better off with closed-ended funds. If a market fall triggers investor encashments, an open-ended manager can be forced to sell his most liquid holdings at relatively low prices. An investment trust doesn’t have this redemption pressure.
Colin McLean, co-manager of SVM Global, a fund-of-funds with more than 60 per cent in emerging markets, prefers closed-ended investments because of the ability to benefit from a narrowing of their discounts to net asset value, their stronger governance and coverage by analysts. He also warns that regional funds can be dominated by a single country’s index weighting.
Peter Lucas, global strategist at Ashburton Fund Managers, says his firm launched its Chindia (China and India) fund because it favoured these growth stories over the wider “Bric” group including Brazil and Russia. “China and India have got real legs and are a purer play,” he says.
Some experts also question the suitability of exchange traded funds (ETFs) for emerging markets exposure. Porcheron notes that some ETFs contain surprising weightings because of the indices they track – the iShares MSCI Emerging Markets ETF, for example, has larger allocations to the more developed South Korea and Taiwan than to Russia and India.