Look at the numbers around emerging markets – the “new G6” nations (China, Taiwan, Brazil, Russia, India and Korea) represent over 30 per cent of the world’s GDP but only 8 per cent of the capitalisation of global equity markets. The traditional G7 countries account for 40 per cent of the world’s GDP but nearly 75 per cent of its equity markets. There is surely an imbalance here.
Many investment portfolios reflect the old world order. Sensible investors look for growth. Here are some more numbers. Last year, the world’s average economic growth rate (in GDP terms) was 5.2 per cent. China is estimated to have achieved 11.4 per cent, India 8.5 per cent and Russia 7.6 per cent. Contrast this with the EU (3 per cent), the UK (2.9 per cent) and the US (2.2 per cent).
It is clear that, for growth investors, 8 per cent exposure to emerging markets is just not enough. I believe 15 per cent is a more realistic figure – which is why the EM benchmark within the T Bailey growth fund is set at 15 per cent, relatively high compared with competitor funds.
It reflects a prudent balance between the prospects and risks.
Perhaps surprisingly, emerging markets can also help lower risk in a balanced portfolio because they are not as dependent on the US as mature markets. India exports only 3 per cent of its output to the US, Brazil and Russia only 2 per cent.
At a time when advisers are looking closely at client portfolios, I would suggest a global fund of funds with healthy exposure to emerging markets offers one of the best ways for investors to access these markets.
The client gets a diverse and sensibly balanced international portfolio of expertly chosen funds from around the world that is constantly monitored to help maintain performance. They get active asset allocation too – the manager can shift the balance of the portfolio to ensure money is in the right parts of the world at the right time and, crucially, move quickly if a country suddenly becomes volatile or it’s time to exit.
Then there are the tax benefits. Money moved round within a fund of funds remains in the investment universe, so is not exposed to potential CGT hits during portfolio changes – and a fund of funds manager is also unlikely to pay initial charges when rebalancing the portfolio.
Jason Britton is co-fund manager of T Bailey