Investment focus - July 2008
A new fund emerging
Continued...
Picking a single emerging market carries extra risks in an already risky sector
Up until now, emerging markets were lumped together in one, big homogenous blob from an investment perspective. And the existence of such a wide-ranging emerging markets sector gives the talented fund manager much to play with. It also gives them quite a long rope with which to hang themselves.
In the past few years people have become familiar with the singling out of the world’s four largest emerging economies — the BRIC economies of Brazil, Russia, India and China — and even more recently with the identification of a ‘next 11’ including countries like South Korea and Mexico. Clearly, no one would suggest that these countries can all be lumped together. The economic and political factors influencing them are quite different. For instance, Russia has been one of the biggest beneficiaries of the oil price hikes lately. China has become the world’s foremost manufacturer. And India is fast becoming the service hub of the world.
Each emerging economy or region is unique, a fact that’s been underlined by the recent rash of fund launches focusing on individual countries or regions, from New Star’s Indian Equity fund to Fidelity’s EMEA (Emerging Europe, Middle East and Africa) fund. There are advantages and disadvantages in narrowing the investment universe to focus on one country or region. The advantage is greater depth of research and knowledge of a particular market. The disadvantage is if a natural, political or economic disaster hits the country or region a fund’s investing in, there’s nowhere for the fund manager to go but down with the ship.
This is particularly evident when you look at the diagram on the next page. This looks at the performance of individual countries, including those making up BRIC, over the 10 calendar years to the end of 2007. There are several instances over that period when countries, including some of the BRIC economies, have moved from the top five to the bottom five the very next year. As you can see, in 1998 Russia was the bottom-performing country, with a return of -83.18%, and in 1999 it was the second top-performing, with a return of 258.28%, a staggering difference of 341.46%.
The diagram above tells us several things:
- Returns from the top-performing emerging markets have been spectacular over the past 10 years.
- Returns from the bottom-performing emerging markets have, at times, been equally spectacular.
- No single country has consistently outperformed.
- The BRIC economies have, on the whole, outperformed the non-BRIC ones. But equally, all except India has featured in the bottom-five performing emerging country indices in the past 10 calendar years.
Emerging markets have proved to be excellent long-term investments over the past 10 years. But the ever-lurking possibility of investing in a ‘submerging’ economy at any given point in time means that many investors may feel it’s safer to invest in a fund offering a broadly diversified portfolio managed by someone who knows what they’re doing.
‘the ever-lurking possibility of investing in a submerging economy means that many investors may feel it’s safer to invest in a fund offering a broadly diversified portfolio managed by someone who knows what they’re doing.’
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