Where the growth is: Two emerging market funds to put in your Isa

Far from being the contrarian play they once were, investors are piling into emerging markets. And with these two funds to tuck away in your Isa, you can grab a slice of the action.

Fifteen years ago, emerging markets were the preserve of the more contrarian or eccentric investor. This started to change in 2001 when Goldman Sachs economist Jim O'Neill coined the now famous Bric' acronym. He predicted that its constituents Brazil, Russia, India and China would enjoy the lion's share of future global growth. As the new millennium has progressed, it's become increasingly clear that O'Neill was onto something.

Even the financial crisis couldn't stop the march of emerging markets. In the past, problems in the developed world have frequently derailed emerging-market growth spurts, as investors suddenly take fright and pull money out of risky' assets.

But while the crisis certainly took its toll on stockmarkets worldwide, emerging markets bounced back quickly. And with the underlying economies of many such nations looking healthier than their developed counterparts, these markets are a useful way to spread your investment risk.

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But which ones should you invest in today? None of the Brics look as exciting as they did back in 2001. China in particular has slowed. But there's a new crop of exciting emerging markets investors should investigate. They can be broadly banded together in two distinct groups.

First up are Mexico, Chile, Peru and Colombia, which recently formed a pro-trade grouping called the Pacific Alliance. All four countries have young and growing populations and are in good macroeconomic shape. With low national debt, controlled government spending and plenty of reserves, their central banks have the tools to ride out a crash if the world economy takes a dive.

Mexico in particular stands out. It has a population of 110 million people that's more than the populations of the other three combined. It's also Latin America's most powerful manufacturer. Indeed, it is the only major economy in the region to earn more than half of its exports from manufactured goods.

Chile, Colombia and Peru, on the other hand, rely more on natural resources. The recent commodity boom has helped them finance infrastructure improvements that should unlock the potential of other parts of their economies.

On the other side of the world the Association of South East Asian Nations (Asean) has also started to attract investors. Asean consists of its founders Indonesia, Malaysia, the Philippines, Singapore and Thailand and later entrants Brunei, Vietnam, Laos, Myanmar and Cambodia.

Like the Pacific Alliance, this grouping has better demographics than China, Europe or America. And it's a big market place with a combined population of almost 600 million. It's also in good macroeconomic health. Asean members learned their lessons from the 1997 debt crisis and, as a result government, corporate and private debt levels are now quite low.

Whereas the Pacific Alliance is less than a year old, Asean has been around since 1967. Now it finally looks like it's making the move from being a talking shop to becoming a meaningful organisation, says MoneyWeek's Asia expert Cris Sholto Heaton.

"Asean is now working towards the Asean Economic Community (AEC). This is a EU-style project to free-up movement of goods, capital and labour across the region. Whether some of the loftier goals for the AEC will be achieved isn't clear. But when it comes into force in 2015, there should be large cuts in tariffs and other barriers to trade and cooperation."

Two ways to profit from the emerging markets

How can investors profit from the likely growth of these emerging countries? One option is the Baring Asean Frontiers Fund (0845-082 2479). The management team led by Soo Hai Lim has a lot of experience in the region and that's translated into a pretty successful investment record.

The US dollar-denominated version of the fund is up 60% over the last three years. The sterling version, which was launched two years ago, is up 12% so far. Top ten holdings range from Keppel, a Singaporean builder of floating oil rigs, to Bank Rakyat Indonesia, a bank that provides microfinance to low-income Indonesian families and businesses.

There are currently no dedicated funds for the Pacific Alliance. However, one very cheap way to gain exposure is to track each country's main index. For example, the HSBC MSCI Mexico Capped ETF (LSE: HMEX) tracks Mexico's IMI index. It is currently at a record high.

Buying on a high is rarely something we like to do. But if you are prepared to sit back and wait for the long-term fundamentals of the Mexican growth story to play out, then this fund is a good way to do it.

The index is skewed towards the consumer brands that should benefit as the country grows richer and more populous. And its annual charge of just 0.6% means you won't have to pay too much in fees in the meantime. Put it on your watchlist, and get ready to buy on any future pullbacks.