Emerging markets are booming again - here's how to play it

Emerging markets are booming again. David C Stevenson explains how to get a slice of the action using exchange-traded funds.

885-Samba-634

Emerging markets (EMs) are booming again. Much of the investment community seems to be betting big on EM equities and bonds outperforming developed-world assets over the next few years, hoping that a weaker US dollar will make it easier for these countries to service their debt payments. There's a particular focus on regions such as Latin America, Greater China and, in a determinedly contrarian way, Russia.

Record fund inflows

One way of tracking this big trend is to look at fund-flow data. In a recent note, UBS' EM-focused analysts looked at data from an outfit called EPFR Global, which identified "huge" inflows of $5bn in the space of just one week. EM equity fund flows in 2018 have seen their "strongest-ever" start to a year. Year-to-date inflows of $33bn are 17% above the level seen in 2013, the next-best year for EM inflows to date.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Much of this money is flooding into exchange-traded funds (ETFs) according to UBS the "$17.5bn inflows into ETFs this year are a high-water mark, as this level was only reached last year by May". The bank reckons it's spotted a general pattern that around 55% of all the money flowing into EM funds is going into passive options, such as ETFs. And an ever-larger proportion of that money is then finding its way into region- and country-specific funds.

General EM funds are becoming a little less popular as investors get more "discerning". Using the bank's own model, many investors seem to be crowding into places such as Brazil and Korea, with China and India not far behind. On the other hand, Russia, Taiwan and South Africa are the least-crowded EMs.

Advertisement
Advertisement - Article continues below

Active vs passive debate

But my guess is that most ordinary investors are a long way behind these trends. EM exposure is usually fairly low in most individual portfolios, and if there is any investment, it tends to be in actively managed global EM funds. But another report out recently this time from analysts at broker Canaccord Genuity sheds light on the old active versus passive debate. Investment trusts are generally the most active of fund structures, and there's a wide choice of both global, country and region-specific funds on the London market.

Canaccord crunched the numbers in search of outperformance called alpha using returns measured against the benchmark and a measure called the information ratio. By and large, global EM funds underperformed, with only 21% outperforming their benchmark over five years. Country-specific funds did a great deal better, though that was largely as a result of the endeavours of Chinese and Indian funds. Most Russian and LatAm funds either underperform or produce very low levels of alpha.

One other insight from the Canaccord report relates to costs. In the Latin American and Russian space, actively managed investment trusts cost anything between 1.19% for a BlackRock LatAm fund, all the way to 2.04% for an Aberdeen LatAm fund. Yet in the ETF space, equivalent country- (Russia) or region-specific (LatAm) funds cost between 0.55% and 0.75%.

Ignore at your peril

Investors looking for proper diversification really can't ignore the sector. Adventurous investors should seriously consider country-, region- or even style-specific funds, such as one focused on value. But if you are determined to stay at the global level, consider using ETFs, which are generally better value than active funds. ETF issuers such as Amundi, DBX, iShares and Vanguard all have MSCI EM tracker funds that charge 0.25% or less. By contrast, any focus on China and India might be better implemented through an active fund, though keep in mind that costs will be higher.

Activist watch

Activist investor SRS Investment Management has kicked off a proxy battle with the board of car-rental firm Avis, nominating three new directors and arguing that its chairman should be replaced, says David Welch on Bloomberg. In a statement, the activist, which owns nearly 15% of Avis' shares, complained that "no movement has been made to refresh the legacy board despite the substantial change occurring in the mobility industry".

Both Avis and its rival Hertz are being pressured by the rise of the ride-hailing model championed by Uber, while General Motors is also experimenting with car-sharing programmes that compete with Avis' Zipcar, notes Welch. Avis is reportedly "disappointed" to be "engaged in a costly and distracting proxy fight".

Advertisement
Advertisement - Article continues below

Disrupt finance with the Rothschilds

An investment firm backed by the Rothschilds' RIT Capital Partners is launching a fintech disrupter fund, reports Citywire's Investment Trust Insider. Augmentum Capital is aiming to raise £125m for its Augmentum Fintech fund. The founders claim to have identified £100m in potential investments in early- and later-stage unquoted businesses.

The portfolio will begin with £33m of existing funds invested in companies such as peer-to-peer lender Zopa and crowdfunding platform Seedrs. RIT Capital is the sole investor in Augmentum's only fund, and will pledge £10m alongside £2.7m from Augmentum managers. The portfolio also includes an 11% holding in precious-metals trading platform BullionVault, worth £8.4m, which in turn includes a stake in investment platform WhiskyInvestDirect.

Neil Woodford's Equity Income Fund is close to the 10% regulatory limit on how much it can hold in unquoted companies, says Peter Smith in the Financial Times. As of last month, unquoted securities made up 9.7% of the £7.2bn fund. Woodford has seen more than £1.2bn of redemptions since May, with several investments, including online estate agent Purplebricks and car recovery service AA, faring poorly. As the value of listed holdings falls, the weighting of unquoted companies in the portfolio will rise, says Smith, risking a "passive breach" of the cap. Woodford's firm says it is "very aware" of the 10% limit.

Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/517395/emerging-markets-buy-when-the-news-is-bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Visit/investments/property/601110/house-prices-and-covid-19
Property

House prices and Covid-19

The housing market is in deep freeze – what happens when it thaws out?
5 Apr 2020
Visit/economy/global-economy/601114/whos-going-to-pay-for-the-war-on-coronavirus
Global Economy

Who’s going to pay for the war on coronavirus?

Central banks and governments are throwing money at coronavirus to stem the pandemic and prop up their economies. But who's actually footing the bill?…
6 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020