Making the most of emerging markets

If we accept that the case for having greater exposure to emerging markets is clear—superior economic growth, rising domestic demand for products and services, and much more robust public finances than in the west—then the question is how to achieve it.

For equity investors, there are at least four ways to approach this problem. First, you can put your money with one or more specialist fund managers. Names that spring to mind include Hugh Young, who runs Aberdeen’s popular Asia-focused funds from Singapore, or Angus Tulloch at First State, who also focuses on Asian markets. Both have returned well over 10 per cent a year since 2000 and although charges on actively managed funds like these will be higher than on passive vehicles such as Exchange Traded Funds (ETFs), performance like theirs is worth paying for.

Another way to think about it would be to pick countries, regions or indeed a concept such as the Brics, and then decide how to access that market. There may well be a specialist fund available as well as an index-tracking ETF, which gives you the option to bet on the continued success of a star fund manager, or to buy a product that will let you achieve a performance that’s close to the market overall, without the need to pick winners.

The third way would be to buy large, multinational companies from the developed world that are deriving an increasing percentage of their profits from operations in the developing world. These companies operate to western standards of corporate governance and tend to have powerful competitive advantages in their markets. ETFs that track big-company indices such as the EuroStoxx 50 in Europe or the S&P500 in the US would fit the bill here.

Finally, you might decide that it’s too hard to pick which markets, regions or managers are going to thrive. In which case, the best approach is to invest in a passive emerging markets vehicle such as an ETF and hedge your bets across the entire developing world. A combination of approaches three and four probably makes sense for most people.

For a UK investor, the return you make from any international investment, whether in a FTSE-100 company with large overseas operations or in a fund specialising in sub-Saharan Africa, will depend on a combination of capital growth, dividends and currency movements. With this many variables in play, it’s quite possible that even if you do manage to pick a winning company or stock market, currency movements that have little or nothing to do with the fortunes of your chosen investment could erode your gains—or indeed amplify them significantly.

Even in emerging markets, there are precious few sure things.