IFA guide to Emerging Market Funds
The demand for Retail GEM Funds Surged in 2009. Defaqto looks at the reasons why this may well continue during 2010
The surge during 2009 of funds in the GEM Sector can be expected to continue. Retail investment into GEM Assets was traditionally and exclusive zone for the most risky portfolios where relatively small asset allocations would be given to a diverse basket of country risk.
The trends have changed, and the risk is much more acceptable to investors seeking income & growth.
It does need to be said that GEM Funds are still based around greater volatility than most other IMA Fund sectors but the rewards have been impressive and UCITS III regulatory loosening has given fund managers the ability to embrace volatility using derivatives and ETFs to diversify risk in the vehicles used, and the regional risk associated with GEM.
So why the change. Fraser Donaldson, Defaqto's Fund Research chief has noted a number of changes which have, over the past 5 years given rise to greater retail demand for GEM Funds:
Globalization : the wider perception of the economic landscape and the actuality of the recessionary pressures that the Credit Crunch created across the world has meant that investors are more aware of the need for stable fiscal and monetary governance across the world. The more developed states in the GEM sector are now seen to be governed in a more responsible, less corrupt fashion than was the case 20 years ago. The states themselves have also seen the dire consequences of short termism in economic activities and states like Russia, Brazil, China etc……see the need and responsibility to govern for longer term stability and wealth.
Low yielding assets in the west have forced investors to look for exposure in countries such as China and India, where economic growth is still forecast at 8-12% . These returns and positive outlooks are no longer available in the developed world. In fact exposure to China and China Focussed Funds will probably continue to drive investors into GEM and Asia (ex-Japan) Sectors during 2010.
The risk of default of large corporates and government backed securities was seen as being far higher in developing countries that developed 10 years ago, The credit crunch has had the effect of highlighting the fact that the differential in default risks for some western states is much closer to some developing states than previously thought. Common examples of this credit risk tightening are Brazil vs Italy.
The US Dollar may be allowed to fall in value against domestic currencies of China, Saudi Arabia etc…….The US Rate cuts & the need for rates to stay low to retain the pace of economic recovery has started to take it's toll on dollar valuations with assets held in lesser developed country currencies benefitting from the respective strengthening.
Although BRIC focused funds still attract a majority of investment in the sector, there has been an increase in the diversity of risk that can be successfully taken by Fund Managers. Eastern European states such as Czech Rep, Bulgaria, Ukraine, Estonia have performed well following a huge debt crisis, North African states such as Egypt, Saudi etc….all offer investors the ability to diversify risk and feel more comfortable with the fact that they have GEM Holdings.
For more information on Emerging Market Funds visit : http://www.defaqto.com/adviser/ifa
For Defaqto Fund Ratings on the Emerging Markets visit : http://www.find.co.uk/my_find/for-ifas/ifa-services/defaqto-ifa-quantrater
