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Emerging views

By Frances HughesEmerging markets funds may lose out at the next Adv-iser Fund Index rebalancing as panellists respond to the prospect of an econ-omic slowdown and rising interest rates.

There are currently eight emerging markets funds across the AFIs. The First State global emerging markets leaders, dimensional emerging markets and Jupiter emerging European opportunities funds are among the most popular.

Bates Investment Services senior investment adviser Paul Ilott says when investors become more cautious, liquidity and volatility become more of an issue.

Ilott holds Jupiter emerging European opportunities in his aggressive and balanced AFI portfolios. He says one of the reasons he chose the fund is because manager Elena Shaftan looks for higher-liquidity companies.

He says: “She invests in the most liquid companies she can find, which tend to be less affected by reduced appetite for risk. We chose this fund because we know she invests on a bottom-up basis. She is investing in high-quality stocks with reasonable liquidity so if she needs to, she can sell those stocks down without undue difficulty.

“Shaftan talks about her fund with great enthusiasm which instils a lot of confidence in investors, especially ourselves.”

But others may not share this confidence. City Asset Management chief investment officer Hilary Coghill says emerging markets funds are a no-go area. She has no direct exposure to emerging markets, saying she is “not bullish enough”.

Instead, Coghill gets exposure to the sector through hedge funds and investment trusts, neither of which is available through the AFI. But she points out that her portfolios get indirect exposure to emerging markets through the European and Far Eastern funds she holds.

Ilott gets exposure to emerging markets in his cautious and balanced portfolios through Asia Pacific funds. He says: “Broadly, the Asia Pacific region makes up around 50 per cent of the MSCI emerging markets free index so, by default, we do have exposure to emerging markets, including Korea, Taiwan, China, Thailand, India and Pakistan.”

Ilott says there is added exposure to emerging markets through trading links. “There is significant intra-country trade within that region,” he says.

Both Ilott and Coghill say there is likely to be a reduction in risk in their portfolios over the next six months.

Ilott says”Global growth is likely to slow and the stockmarket is discounting a fairly benign outlook. If something occurs that disrupts that outlook in a negative way, we could see a short-term stockmarket correction. We would look to guard against that.”

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