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Out of Africa

With the stockmarket edging only tentatively towards a recovery, IFAs and investors are continuing to seek alternative areas in which to generate positive returns.

One of the sectors is emerging markets. Many fund houses claim the area offers widespread opportunities, provided that precautions are taken to avoid the more precarious countries.

First State global emerging markets senior analyst David Gait says: “Our view is that if investors are going to be in equities, then emerging markets are as good, if not better, than any other sector.

“Emerging markets have superior growth rates – around 8 to 9 per cent in China&#39s eastern seaboard for example – and valuations are extremely attractive whatever way you look at it. Over the past 18 months, returns have held up very well compared with global markets.”

Gait also points to the improvements in corporate governance in Asia, saying the region suffered its Worldcoms several years ago, and the signs of improvement in countries such as Korea.

But there are few IFAs prepared to take what even some fund managers acknowledge are higher risks.

Plan Invest joint managing director Mike Owen says: “Most clients are risk-averse and emerging markets have notoriously been a difficult area to make money in. We never put more than 5 per cent of a client&#39s portfolio in an emerging markets fund and, even in the occasions when we do, it is in a well diversified fund from solid providers.”

Some IFAs, like Michael Philips proprietor Michael Both, even doubt the accuracy of the marketing literature published by the fund managers with emerging markets funds. Both says: “The problem with emerging markets is that nobody knows what it means any more. Can you trust what the fund managers say in their literature? I am very wary of this and so are my clients, who are not looking for additional excitement at the moment. I am more concerned about the main markets recovering.”

If global emerging markets funds are unpopular with IFAs, then is there any hope for funds that invest in individual emerging nations?

Historically, at least, the answer seems to be no. Credit Suisse was forced to close its South Africa fund in 1997 after less than three years when the excitement surrounding the country during Nelson Mandela&#39s rise to power began to tail off. The firm says one of the problems was marketing the fund which, despite a decent track record, was entrenched in investors&#39 minds as investing in a politically unstable country.

However, Old Mutual still has a London-listed South Africa trust which continues to outperform after changing its benchmark to include all company shares earlier this year. Its investment adviser Peter Linley says the company prefers emerging markets – especially South Africa – over developed markets because valuations are cheap, with price/earnings ratios often lower than 10. He expects the trust to do well institutionally but admits that getting retail investors interested is an uphill struggle.

He says: “We have tried to make some inroads into the retail market and get the trust some exposure but I cannot say we have had a great deal of success.

“Some of it is down to knowledge. Retail investors do not want to be investing in a particular country or in emerging markets in a downturn. But we do not actually believe the US is going into a double-dip recession – which would hit these funds – and even if global growth goes negative, the slide has already been priced into valuations.”

Nevertheless, IFAs remain unconvinced. Hargreaves Lansdown head of research Mark Dampier says: “The problem is that South Africa is far too small an area and too speculative for most investors. It is like Brazil or Mexico – they have moments in the sun but too often you do not want to have money there. The rand has crashed as well, so there is a big currency risk. South Africa is also politically unstable. Will it exist in its current form in 10 years time?” Dampier acknowledges that there is money to be made in gold and diamonds in countries such as South Africa but doubts whether many investors have the skill to invest and withdraw at the right times.

Merrill Lynch has a gold fund with 35 per cent invested in South Africa but as manager Evy Hambro points out the companies are chosen first, not the country of origin.

Emerging markets fund managers say their funds are often unjustly categorised as high-risk because a handful of poorly performing funds drag down the sector.

Framlington emerging markets fund manager Jonathan Asante says as long as managers steer clear of companies in sectors where margins are unsustainable, such as PC manufacturers in Taiwan, then relatively safe and substantial returns are there for the taking.


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