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Difference of opinion

Two funds for the price of one this week. Allianz RCM Bric stars and Aberdeen emerging markets inhabit a similar space. The latter has come in for criticism over the last few years because despite making excellent returns, it has lagged behind its peer group. Yet if you understand Hugh Young’s investment style, this was to be expected. Needless to say, over the last few months, it has outshone the rest of the global emerging markets sector.

The Bric fund has suffered to a greater extent over the last half year. Its more concentrated portfolio and the fact that these markets have had a great five or six years make it more susceptible to profit-taking.

Both funds are run by top managers. In the case of Allianz, it is Michael Konstantinov. For Aberdeen, it is Devan Kaloo who works as part of Young’s superb investment team. Both funds have great resources behind them and, in truth, the choice between the two really depends on what level of concentration you want to take within your portfolio. Indeed, many investors will choose to buy both, given their different exposures.

The Aberdeen fund has its biggest weightings in Brazil and India followed by Mexico. It is far less keen on Russia because it worries about corporate governance. The Bric fund is almost equally weighted in the four countries, with a slight bias towards Brazil and Russia.

Given the vast potential of the countries, you might ask why the Bric fund has suffered more over the last six months. In the main, it is because they have risen so strongly for over five years and, as such, are a prime candidate for some profit-taking as investors begin to worry about the short-term outlook for global markets.

The team at Aberdeen had the flexibility and astute judgement to weather the storm far better than most of their peers. Young’s style is to look for good value companies with little or no debt on their balance sheets and which could be held in the portfolio for the long term.

The developing world looks far better placed to cope with the problems in the financial sector at present. Indeed, some of them may be laughing at us because they went through their own financial crisis in the 1990s and were lectured by the West about prudent management. Now the boot is on the other foot.

The Bric economies, for example, have contributed close to 30 per cent of global growth over the last five years and have some 2.7 billion people aspiring to live in the way we do in Europe. These areas clearly are not immune from the problems affecting the developed world but their own domestic demand shields them from the brunt of it and their own banks have little exposure to US sub-prime debt.

Some markets such as Russia have fallen very sharply over the last few weeks, in Russia’s case because of commodities. However, Russian equities are now priced at around five times earnings and look quite incredibly cheap.

India is Young’s preferred market, with very good corporate governance, English accounting standards and a young workforce.

Both funds make excellent regular savings plans, allowing the volatility to be ironed out over time. I have been investing on behalf of my own son in Aberdeen emerging markets since he was born in 1990. For those with lump sums, I would suggest phasing in the money on the bad days.

Stockmarkets will stay volatile for the foreseeable future but emerging markets seem to me to have the greatest potential of all over the next 10 to 20 years.

Clients have a tendency to give up when the going gets tough. This is not the time to do so. As I said, above these areas are looking very good long-term value right now.


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