The removal of a number of generalist emerging markets funds from the Adviser Fund Index portfolio may demonstrate a more nuanced view.
Last year, net private inflows into emerging markets totalled £559bn and flows are expected to exceed £620bn this year, according to the Institute of International Finance. Whether the stockmarket performance will justify this optimism is another matter.
Given the broader trend, it might be a surprise that within the funds excluded from the AFI portfolios are three emerging market funds, including the £1.8bn First State global emerging market leaders fund.
Some panellists question the logic. “I think it is about taking some risk off the table but I am slightly surprised the First State fund has been kicked out,” says Tim Cockerill, head of research at Ashcourt Rowan. “In the six months up to the rebalancing, a lot of emerging markets had come off quite sharply, so I wonder whether this was a bit of a kneejerk reaction.”
The rebalancing in May did not suggest a general shift away from emerging to the developing world. There was a 10 per cent move out of other equities and the portfolio rejig also saw a 5 per cent switch into Asia Pacific assets.
Cockerill suggests this could be a relative value play as the Asia Pacific region has underperformed since the last rebalancing. In sterling terms, the Hong Kong Hang Seng dropped by 7.66 per cent in the first six months of this year.
Other panellists, however, caution against simply shifting the geographical allocation of a portfolio to drive returns. Graham Toone, the head of investment research at AFH Independent Financial Services, says the evidence indicates there is no direct correlation between GDP growth and stockmarket returns.
He says: “I can only guess the May rebalancing reflects people were wary over problems in North Africa and the Middle East. Our view is we should not be investing by looking at geography and we favour sector analysis.”
In terms of sectors, there were few identifiable trends in the AFI portfolios. Only basic materials saw an increase across all three of the benchmark indices.
Cockerill says negative macroeconomic news can also have an effect, driving investors away from geographical regions even as the markets start to present value. He says: “I would have expected to see the reverse in May, with money moving from emerging to developed markets.
Europe is often seen as one homogenous group but despite problems in the peripheral eurozone countries, there are plenty of excellent companies there.”
AFI panellists can note the fact that in November 2009 the Asia Pacific sector accounted for only 13 per cent of the aggressive portfolio against 21 per cent today. Emerging markets look set to remain a core fixture of investor thinking over the long term.
Data supplied by Financial Express