Sing about the brics for a spot of Isa excitement

Rewards beckon amid the risks but investors should be sure to treat  the emerging markets with caution, advises Neasa McEarlean

With only two weeks to go until the end of the Isa season on 5 April, a lot of money is heading into the riskier end of the spectrum through emerging-markets funds. At least one big player, Chelsea Financial Services, believes twice as many people might opt for the sector this year, taking the total invested up from 5 to 10 per cent on its platform.

There are other signs that emerging markets have again caught the imagination of many more sophisticated investors this year. Aberdeen Asset Management, one of the two leading managers on emerging markets, is introducing a 2 per cent initial charge on its £3.7bn Aberdeen Emerging Markets Fund, the biggest unit trust in the sector, from 15 April. This has been taken “as a further step to reduce inflows” into the fund because, despite other measures taken to discourage excessive investment, Aberdeen is concerned it could receive more new money from enthusiastic investors than it can sensibly handle.

Another sign of renewed investor interest is that, in a time when there are very few launches, two new funds have been opened recently in the emerging-markets sector. The Matthews China Dividend Fund was launched in January, on the heels of the Emerging Income Fund from Newton.

For those who want to invest in the  Bric countries – Brazil, Russia, India and China – and others which are still developing, there are two big names.  “Aberdeen Asset Management and First State have dominated the market over the last two decades,” says Adrian Lowcock, a senior investment manager at the Isa platform-provider Hargreaves Lansdown. “It isn’t easy to make money in emerging markets consistently but that’s what those two have done.”

Many other houses participate in the market. Newton, with its Asia Income Fund and the new Emerging Income Fund, is one of the leaders opening up the sector to specialist funds dedicated to paying an income.

“The development of income funds is a really significant sign that corporate governance is a lot stronger than it once was,” Mr Lowcock says. He thinks the potential for such funds in parts of the globe is marked. “The Asians are strong savers and quite cautious: they like having a dividend.”

Emerging markets are to be approached with caution, however, as their share values will tend to fluctuate more wildly than those of the more developed economies. Many investors had their fingers burnt when they followed star manager Anthony Bolton into his new Fidelity China Special Situations fund three years ago. Share prices lurched down to 70 per cent of their opening value as Mr Bolton learnt that some of the companies he had invested in had not been totally straight in reporting their results.

The track record of China Special Situations underlines the advice that emerging markets investments should be made for a minimum of a decade.

Currency fluctuations are another risk of investing overseas, especially in less stable regimes. The G20 agreement last month to avoid currency wars does not mean that the recent volatility is over. Keith Evins, the head of retail marketing at JP Morgan, says: “Quite often, the more general emerging markets funds will be hedging away currency risk. Some do, some don’t. It’s a sensible thing to do.”

To find out if they have clear powers to hedge, investors need to look at the objectives of the funds. For instance, the JP Morgan Africa Equity fund “may invest in assets denominated in any currency, and currency exposure may be hedged”.

People entering emerging markets for the first time are best advised to go for the large diversified global funds rather than going into narrow country funds. So they might, for instance, go for Aberdeen Emerging Markets or First State Global Emerging Markets.

Over the past five years, the First State fund has delivered total returns of 89 per cent – in part because the manager, Jonathan Asante, is empowered to take shelter in multinationals with an emerging markets bias during difficult times, rather than going deep into the countries themselves. Neptune Russia & Greater Russia, which has to invest “mainly in Russian and Greater Russian companies”, has fluctuated by as much as 60 per cent in market value in the past five years. Its total return in that period is just 3 per cent.

There is debate now as to whether Brazil, China and certain other countries often called “emerging markets” should still bear that label. China, for instance, where historically low wage costs are rising, is turning to some African states as low-cost suppliers to support the development of the Chinese middle class.

As these shifts occur, some investors who targeted emerging markets a decade ago are looking at “frontier markets” such as Vietnam and Bangladesh, which offer substantial growth opportunities but have yet to emerge as stable investment economies. Mr Lowcock recommends that individual investors put no more than “2 per cent tops” into this category.

Brazil is attracting more attention – not least because it is hosting the 2014 World Cup and 2016 Olympics, which could trigger higher growth and improved investment stability. The Allianz Brazil Fund was a top seller on the JP Morgan investment platform in 2012, and at the start of this year.  But a more cautious way of entering Brazil than going for a single-country option would be to invest in a fund such as the Aberdeen Latin American Equity Fund or First State Latin America.

Investors in emerging markets funds will often be described as “sophisticated” by financial advisers. This tends to mean they have a way of protecting themselves from the volatility and other risks of the sector. Wealthy people who have built up a good base in income funds and in the UK fall into this category, as they should be able to ride through years of volatility and could accept a loss of some, or even all, of their emerging-markets investment.

Another group are children who can invest long-term. Parents will not want to put that much of their offspring’s Junior ISA funds into the rougher end of emerging markets but they could put 5 per cent or so into the general emerging markets funds. Assuming that toddlers will not be needing the cash for 15 years or more, they are the investors who are potentially the most “sophisticated”. As Mr Evins says: “The younger you are, the more risk you are likely to tolerate.”

Case study: Monthly investments smooth out the bumps

Euan Grant has been investing in emerging markets since the 1980s.  “The performance has been positive,” he says. “Over the long term they have been pretty good and I’m fully satisfied.”

The former Customs officer started out with small lump-sum investments in unit trusts in the Pacific Rim, excluding Japan. “The growth, lack of debt and resilience of these countries was already becoming known,” he says.

Since then he has switched over mainly to making monthly investments. The smoothing effect of investing monthly keeps the volatility down and means he does not make a lump sum investment only to see it fall in value by 30 per cent, which can happen in these markets.

From his home in London, Mr Grant has held his equity investments on the platform offered by Chelsea Financial Services.

He has not invested directly in India but adds: “Some of my holdings – in Unilever and Vodafone, for instance – are proxies for India.” He is exposed to China through a Hong Kong fund.

He has largely stayed out of Latin America but is thinking of going into Brazil within the next six months. “Brazil is a good proxy for growing demand for food,” he says.

Although Mr Grant has seen some of his investments yo-yo at times, he is still committed to the emerging market sector for a portion of his Isa allowance.

What does he expect to earn? “A high single-digit total return is not unreasonable,” he says.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Content Writer - Global Financial Services

    £25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

    Recruitment Genius: Web Developer - PHP

    £35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

    Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

    £15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

    Recruitment Genius: Loan Underwriter

    £18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

    Day In a Page

    The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

    The Silk Roads that trace civilisation

    Long before the West rose to power, Asian pathways were connecting peoples and places
    House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

    The honours that shame Britain

    Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
    When it comes to street harassment, we need to talk about race

    'When it comes to street harassment, we need to talk about race'

    Why are black men living the stereotypes and why are we letting them get away with it?
    International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

    International Tap Festival comes to the UK

    Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
    War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

    Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

    Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
    Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

    'A subversive brothel keeper and Communist'

    Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
    Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

    BBC heads to the Californian coast

    The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
    Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

    Victorian fraudster who shook the Bank of England

    Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
    Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

    Car hacking scandal

    Security designed to stop thieves hot-wiring almost every modern motor has been cracked
    10 best placemats

    Take your seat: 10 best placemats

    Protect your table and dine in style with a bold new accessory
    Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

    Cook not the only one to be caught in The Oval mindwarp

    Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
    Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

    Can Benitez get the best out of Bale?

    Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
    Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

    Beijing witnesses new stage in the Jess and Kat rivalry

    The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
    Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

    Jeremy Corbyn interview: A shrewd operator desperate for power

    His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
    Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

    Isis executes Palmyra antiquities chief

    Robert Fisk on the defender of the ancient city's past who was killed for protecting its future