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A buying opportunity has emerged in emerging markets

Emerging markets — hung out to dry in recent years.

Ten years into my hardcore investing obsession, I’m still surprised how predictable investors can be.

Take the cycle of fear and greed, for example, and put emerging markets in for spin.

A few years ago you’d get shouted down if you suggested that unloved US and UK equities might be as good a home for your money as emerging markets.

Yet now the average investor doesn’t want to touch emerging markets with a barge pole. [Note to editor: Please insert witty comment about the indigenous boat people of an exotic island nation here.]

There are doubtless multiple reasons why emerging markets have done poorly for the past two or three years. Pundits point to inconsistent economic growth, stifled reforms, political risk, lower commodity prices, and the end of easy money.

To my eyes, though, optimism and pessimism has played its usual starring role – expressed as ever through the valuation put on traded assets like shares.

Emerging markets can go down as well as up

Immediately after the financial crisis, the West was in the doghouse while emerging markets powered ahead. Our shares were cheap on various metrics, theirs were arguably expensive.

Myopic investors made giddy by recency bias assumed this state of affairs would continue forever.

They also ignored warnings that economic growth was not a predictor of stock market returns – basically because anyone can see when a particular country is booming by reading the newspapers and watching the news.

So by the time the average investor – whether professional Gordon Gecko type or enthusiastic oik like us – arrives at a promising scene, the party is in full swing.

If you arrive late, you pay a high price to be part of the in-crowd in terms of the P/E multiples and price-to-book ratios you pay for your shares. That leaves little wiggle room for future disappointments – and sometimes mediocre returns even if things go as planned.

Beaten by the ‘broken’ USA

Since then the mood has soured on emerging markets. Yet all the problems they are said to face today existed when everyone loved them, too – at least on a longer-term perspective – as well as the opportunities.

To me, that makes emerging markets a more attractive place for my money, rather than less so.

If you’re a smart passive investor, you probably already have an allocation to emerging markets. Take this article as simply saying that when you come to rebalance your equity holdings and see that your emerging market index fund is down, hold tight and top up.

Smile inwardly! What goes around comes around. That’s exactly why you’re rebalancing, in fact.

As for us nefarious active investors, the pessimism could make for a fertile hunting ground, especially after double-digit gains in the developed world this year make some of them, notably the US, look more fully valued.

See how the soaraway S&P 500 has trounced emerging markets in 2013:

S&P 500 versus iShares Emerging Markets ETF (EEM)

S&P 500 versus the iShares Emerging Markets ETF (EEM)

The S&P 500 has beaten the iShares emerging markets ETF by more than 30% in the year to-date.

Will that stellar level of outperformance continue?


Will it be replayed every year for the rest of the decade?

I’ll go out on a limb and say: Not on your nelly.

We’re all in it together

The extreme case made for loading up to the eyeballs in emerging market shares never made much sense to me, even when they were doing well.

Yes, the citizens of emerging nations are mostly younger than us, and they have faster growing economies. But we were (and are) the wealthy ones, and we have plenty to sell to them, too.

The UK FTSE 100, for example, generates more than 70% of its revenues from overseas. UK consumer goods giants like Unilever (Dove, Bovril, Marmite) and Diageo (Johnnie Walker, Baileys, Guiness) get a huge proportion of their sales directly from emerging markets.

For this reason, even if the UK and US economies were doomed to decades of stagnation or worse – which I doubted then and now – it might be different for our listed companies. Not for nothing do critics of Western capitalism paint them as rapacious locusts scouring the globe for profit.

Besides, I believe the truth is a less sensational halfway house.

Western economies will grow, probably a little more slowly than in the past, and our companies will likely keep a (shrinking) technical edge over most emerging rivals. But the latter will have strong domestic demand to easily tap into.

Emerging markets as a whole will be volatile, and some will utterly disappoint, whether for economic reasons or because they’re taken out in a military coup. Or some lesser evil.

By diversifying and dripping in money over time, you’ll be able to dilute the duds and profit from those markets that – well – emerge!

Emerging market investment trusts

For my part, for 6-12 months I’ve been increasing what was a too-small allocation to emerging markets. Mainly by fiddling about with my index fund allocations but also by buying shares in relevant investment trusts.

So far it’s not been wildly successful, but this is long-term money that I add to piecemeal.

In addition, I own a couple of family-run global investment trusts that have floundered in part due to their emerging market exposure, particularly RIT Capital Partners and Hansa Trust. (The latter is mainly an idiosyncratic bet on Brazil and other emerging markets, though you might not realise that at first).

I have also put more money into companies hurt by their association with emerging markets, such as Unilever when it fell below £23.50.

When I scan some of the emerging market investment trusts, I do wonder if I should be bolder. That’s because fear and greed is doubly captured in the discounts they can trade at to their assets.

Here’s a few I’m mulling over:

Ticker Discount/
Yield YTD1
Aberdeen Asian Income AAIF +1.6% 4.0% -12%
BlackRock Latin American BRLA -10% 5.4% -19%
JP Morgan India JII  -15.5%  n/a -10%
Hansa Trust HAN -26.7%  2.0% 16%
Templeton Emerging Markets TEM -9% 1.2% -9%

Sources: AIC Stats for trust data and Google Finance for year to date returns.

Please note that I’m not recommending the trusts above as good buys. I don’t give advice, and you will need to do a lot of research yourself.

These are just a few of the trusts that I’ve been considering – and there are plenty of others to look through. In some cases there are definitely reasons to be cautious.

Finally I’ve even boldly gone beyond the pale, to Frontier Markets. Only a smidgeon invested in that, but it’s doing okay so far. It’s one for the very long-term.

Not every emerging markets investment trust looks cheap. JP Morgan Emerging Market Income (Ticker: JEMI) is on a small premium, as is Aberdeen Asian in the table above.

I suspect in today’s yield-hungry world, a 4% dividend yield trumps even fear!

For all the bulls in China

I am not claiming to have called the bottom for emerging markets, or anything like that2. You could imagine them falling much further from grace, especially if investors weren’t being pacified by strong returns elsewhere.

But I do think they look shunned and therefore worth an extra poke.

You might be surprised how quickly sentiment can change. Fidelity China Special Situations (Ticker: FCSS) is a case in point.

  • In summer 2013, FCSS reached a low of 81p and the discount surpassed 11%.
  • Now they cost 105p to buy. That’s a 30% rise in just five months.

I’m not saying (of course!) that it’s easy or sensible to look for quick returns like that. I’m suggesting it’s a better time to buy and lock away this asset class for the long-term than it was just 2-3 years ago.

Still, the sudden reversal of opinion about China is an excellent example of just how fast people can change their minds about a particular emerging market – and how rapidly it can be reflected in share prices.

  1. Year to date. []
  2. Especially as I’d be late on current evidence – they seemed to touch base a few months ago. []
{ 29 comments… add one }
  • 1 demeter December 11, 2013, 7:25 pm

    I’m going down the EM path and intend on making it the largest allocation in my portfolio. I cannot understand why people have such a low allocation e.g. 5% when EM already contributes approx 50% global GDP and is growing! The Chinese and Indian economies will dwarf the US and EU in the future.

    I’ve also been looking at the JP Morgan India; tasty looking discount.

    Standard Chartered bank as an individual stock play has a lot of Asian exposure and is low priced at the moment.

    Surprised you’ve not put the Blackrock Tracker on your list though?

  • 2 TCA December 11, 2013, 7:41 pm

    Good article and I tend to be in agreement. I bought SOI in November and AAIF this month. Both unfortunately have dropped a little in share price since I purchased (most in the last two days actually), but if anything I’m encouraged to buy even more if they fall even more! Also looking at JEMI and HEFL for income and TEM is one I like and have been tracking for a while as a long term growth purchase. For small company exposure in the area I like AAS and SST, but they’ve done far too well recently and would need to lose a bit of that gain before I’d consider buying in. Interesting to see what wobbles occur around the (potential) tapering of QE in the US.

  • 3 TCA December 11, 2013, 7:44 pm

    Typo. Above should have read HFEL. Henderson Far East Income.

  • 4 demeter December 11, 2013, 7:57 pm

    I like the look of the Advance Frontier Markets, I’ve been looking for something like that for a while but could only find the N11 fund which I wasn’t enthralled by, and the DB X-Trackers S&P Select Frontier ETF, but again this has some short coming; its a derivative / synthetic with counter party exposure.

  • 5 gadgetmind December 11, 2013, 8:18 pm

    I put a few bob into HFEL last week in my HYP portfolio.

    I’m also considering adding JIIS to my, err, “high risk” portfolio as it’s a massively leveraged bet on JII coming good.

    OK, I’ll come clean “high risk” is actually labelled as “bat shit crazy” on my Google Finance portfolio of similar, err, “investments”

  • 6 Jeff December 11, 2013, 8:27 pm

    Which one has an uncovered dividend!

  • 7 dearieme December 11, 2013, 9:19 pm

    AFAIC, PLTCA use too many acronyms. ISYA.

  • 8 ermine December 11, 2013, 10:13 pm

    I keep on looking at JII. And then at the currency risk 🙁

    Interesting that EM seems to always be about parts of Asia and South America. The entire continent of Africa seems to be almost totally beyond the pale for collective EM investments…

  • 9 ermine December 11, 2013, 10:18 pm

    okay, maybe I should have read the factsheet for Frontier Markets first. Africa is a frontier market, not an emerging market, it seems.

  • 10 The Investor December 11, 2013, 11:18 pm

    @demeter — As I say in the article I have been changing my index funds allocations. But the table is very specifically investment trusts, so I don’t know why I’d have a BlackRock tracker in there?

    If you like JP Morgan India you want to make sure you’re up to speed with events — an activist shareholder has forced some potentially nice changes there, including a 20% reduction in the management fee and putting buybacks on the table to control the discount.

    The trouble with Advance Frontier is twofold. First it’s a double layer of fees. Secondly, it will become doubly hit in any kind of panic (because you’ll get discounts on discounts). So I’m definitely only using it for a small amount of long-term money, personally. But for that, I think it’s a welcome way for us everyday investors to get some Frontier exposure.

    @gadgetmind — Risky indeed, especially as my notes show they’re due to expire in February. 🙂 Are you ready to pony up for the underlying if the value doesn’t out by then? I bottled that earlier this year on the Perpetual Subs, which I slightly regret.

    @TCA — Yes, I hold Templeton (TEM), too, and I like the manager. I toss spare cash into it every now and then, nothing more scientific than that. I could have put another 10 interesting trusts in the table, but there’s not really any point – all the data is accessible from the AIC stats page, and everyone interested will need to dig in themselves anyway. 🙂

    @Jeff — BlackRock Latin America’s latest results show revenue was slightly insufficient to cover the dividend. My notes also say it’s been tight before, though I haven’t time to look again right now.

    But there are many parts to a trust as you probably know. There’s a revenue reserve that can top up the dividend. Trusts are also allowed to use capital gains to pay dividends (selling the family silver, as some see it). So the fact it is currently uncovered isn’t as dramatic as it would be for an ordinary operating company.

    You sound so alarmed, using an exclamation mark instead of a question mark, that I’ve slightly modified the copy. My point was meant to be that any investor in investment trusts needs to read the annual reports and so on to understand exactly what they’re buying (Hansa is another case in point) rather than to flag up this particular issue. 🙂

    @ermine — Currency risk has upside as well as downside. You’ve said many times you think the pound is going to be devalued away. Investing overseas is potentially one way to mitigate that. 🙂

    Yes, if you want sub-Saharan Africa, you need to go Frontier at present, or else into certain listed companies (some big so it’s only a partial play, and the others pretty risky!)

  • 11 Greg December 12, 2013, 1:30 am

    I’m a big fan of EMs. People keep going on about how everyone should put pretty much all their money in developed markets, but EM’s have trounced them over the last decade _and are still cheaper_. (I’m a bit concerned about their connection with commodities though, which have behaved similarly, so I’ve tried to account for this.)

    I hold a big slug of JII, (I just converted my JIIS holding – don’t get the sub shares whatever you do – the B-A is huge, they expire on 2nd January and they don’t guarantee conversion within 15 days.) Valid subs are thin on the ground – the only two that seem even vaguely sensible to me are WWHS and SLES, neither of which are EM.

    I like India because it shouldn’t tank if commodity prices fall, unlike a lot of other EMs. I also note that historically countries take off 20 years after they start educating their women properly, which India started doing about 20 years ago…

    I have a smidgen of TEM, a lump of a South Korea tracker (not really EM), a lump of HANA, and a lump of an “Eastern Europe” (Russia and a bit of Poland) tracker. Everyone’s forgotten about Russia and I’m a little scared about corruption, Putin, etc. but it’s just sooo cheap! (I also have a small amount in a fairly low beta active OEIC – First State Asia Pacific Leaders, which I’m building up with small amounts over time to enable me to keep my overall weighting stable during underperformance. It has the advantage that at some point it will get to a size where I can then sell and top up an IT.)

    Tbh, if starting anew I’d probably have gone with a couple of more general ITs rather than picking countries with passives, even though I like my current set of holdings. Don’t forget the large-cap Aberdeen Asian ITs (Edinburgh Dragon & Aberdeen New Dawn). Personally, I would avoid anything with “income” in the name – except perhaps Aberdeen Latin American Income which has just dropped to a tasty 10% discount (2.5 sd below normal), making it perhaps a worthy alternative to BRLA, which I’ve had my eye on too. (But only out of interest – my EM exposure is high enough!) Note that ALAI is a bit more expensive and has a 40% bond allocation, making it not directly comparable. Massive yield too, if you like that sort of thing… (Don’t get the subs for that either! 🙂

    I would go with the dribble in over several months (perhaps timing discounts if you have enough money to make that feasible) approach though.

    As for frontiers, I would quite like a small holding due to the low correlation and I think an IT is the only way to go (not even trackers). However, they are in vogue right now, so I’ll wait until EMs have recovered and frontiers have taken a spanking before dipping my toe in (possibly with BRFI).

    Finally, perhaps a tiny regular contribution to EM debt might be of interest? I like the Investec EM Local currency debt fund (or the relatively new “blended debt” version.

    Hmm, I do seem to overcomplicate things… I’m a fan of big, diversified trackers too, even though it doesn’t look like it!

  • 12 Geo December 12, 2013, 8:57 am

    I think Black frontiers seems better than Advance mainly because it doesn’t have a double fee layer (because it doesn’t invest in other trusts). I’m watching it but seems to have propelled up rater a lot, in fact frontiers have had it good over the last year so I’m not sure I’d lump then with the same value tint as Em markets. Murray International is a good large trust with lots of EM exposure for anyone getting started.

    There are certainly are some tasty discounts out there, just make sure you use the AIC to check its not the norm as trusts do regularly trade at a discount as I’m sure TI must have posted about somewhere.

  • 13 Neverland December 12, 2013, 9:07 am

    I’m surprised no one has mentioned the index tracking etfs available from ishares and vanguard

    The current discounts on emerging market investment trusts don’t generally look that great to me based on a 30 year view (there will always be single country funds in the doghouse)

    If you compute the extra annual fees versus the initial discount are you sure they are that much of a bargain?

  • 14 The Investor December 12, 2013, 10:53 am

    @Neverland — I mentioned emerging market trackers in the article and also in the comments above when someone else asked why I didn’t list a tracker. I agree they are worth consideration, too; I use them.

    @Geo — Yes, discounts are the norm for most non-income touting emerging market ITs. The ‘value’ play I am suggesting might be here is really in the underlying emerging market assets/sentiment. That said, buying at a good discount doesn’t hurt as in optimistic times many do narrow for a short time, which can give an opportunity to exit. Re: Frontiers, indeed, they have been a hotter story this year. As mentioned above my Advance Frontiers is up, while the “true” EMs are down.

    @Greg — Yes, I’ve looked at Aberdeen Latin America and the discount is very unusual there, so potentially a real opportunity. The trouble as you say is the bond allocation. If EMs are partly selling off because of currency concerns re: the Fed and dollar, then that will hit them harder, so I haven’t decided that I want to pay up for that here. (I’ve been considering getting EM bond exposure through an ETF, but separated out so I can keep an eye on it.)

    I don’t think 30% in emerging markets is unreasonable for a young-ish and long-term investor who is certain they can hold through volatility, though it’s more than I’ve allocated. I certainly think now is a better time to move towards it then a few years ago when a lot of people were suggesting over-weighting emerging markets, that’s for sure! 🙂

    While valuations are converging, I’m not yet certain in my own mind whether EMs “should” be much cheaper than developed markets for the risks and volatility, or more expensive for the prospects, or about the same! Past isn’t really prologue here in the long-term (the US was an emerging market 100 years ago, etc) but it’s an interesting one to think about staring into the fire with a cup of hot chocolate on a cold night.

    Agree re: the JII subs. The one time I looked the spread was something like 25%, too. I did nicely with SLES at the start of the year, then sold after they shot up with the market. They kept going… Still look ‘cheap’ on pre-crisis valuation, but the market doesn’t seem to be applying that to (pseudo) options much at present. The Perpetual subs I mentioned earlier never really got to a sensible level implied by the underlying while I was watching, though I wasn’t in when they converted. (Anyway, all this is probably for another thread… 🙂 ).

  • 15 OldPro December 12, 2013, 11:25 am

    Nothing to say against emerging markets … (ahem… perhaps the food in one or two of them… Delhi Belly and all that…) Will add though that since this morning the humble FTSE 100 is no longer up “double-digit” gains this year… The Americans are racing ahead it is true but … perhaps we shouldn’t be so scared of heights here at home?

    … probably a topic for another article… Please resume normal service now.

  • 16 Demeter December 12, 2013, 5:15 pm

    @ The Investor: I admit that somehow I missed the ‘Emerging Markets Investment Trusts’ sub-heading when I mentioned the Blackrock tracker, however this website is known for it’s advocacy of indices, so they are quite often on my mind when I come to this website.

    I’m sure you must have heard about the EAGLES and EAGLES NEST countries and their contribution to global growth:


    The Hansa Trust seems appealing and intriguing but looks quite a risk. 35% invested in one company and that single company has very strong ties to the actual investment trust itself; they share at least one director. Although I have to say they do seem very well connected.

  • 17 Greg December 12, 2013, 7:41 pm

    @Demeter – you need to dig a bit deeper into HANA. 🙂
    The “single company” Hansa has a big slug of is part shipping business, part investment trust. This reduces the risk somewhat.

    You are right about the interlinking complicating things though – Hansa can’t sell its stake in OW, meaning it can’t do buybacks without becoming even more biased to OW. Personally, I’m happy to tag along with the Salomons, particularly as they are making noises about marketing it more which might narrow the discount.

    I’m fine with the various issues like non-voting shares, fairly high B-A, family ties, trust-in-trust oddness and it’s large single company holding that it won’t sell any of. I think all that puts so many people off it is undervalued.

  • 18 Greg December 12, 2013, 10:22 pm

    Oh and one pair of ETF’s I’m keeping an eye on, mostly out of interest for now, are two minimum volatility EM ETFs. I think Min Vol makes more sense for EMs as they are so diverse.

    EMV (iShares 0.4% TER, NOT REPORTING STATUS YET, http://uk.ishares.com/en/rc/products/EMV )
    LMMV (Ossiam 0.75% TER, Reporting status http://www.ossiam.com/index.php/solutions/ossiam-emerging-markets-minimum-variance-nr-ucits-etf-1c-usd# )

  • 19 PaulM December 13, 2013, 12:10 am

    I’ve long been a fan of EM trusts, and am invested in several of the funds mentioned above.

    The great attraction / hope over trackers/ETFs is that the discount narrows and the market rises and the profit escalates.

    For this reason I’ve also been a fan of fund-of-fund EM investment trusts. SVM Value Trust now managed by Henderson is a case in point. The theory here is the FOF manager has some skill / knowledge that I don’t have in picking managers of EM trusts. These trusts themselves generally trade at a discount and the profit boost over and above market improvement comes when they get fashionable or get wound up and their investments are realised at par.

    So the FOF investment trust in Emerging Markets generally will have two levels of discount to NAV – the quoted one, and a further level which is associated with the component trust shares.

    I can honestly say though that over 30 or 40 years of this investing, there’s less interest and excitement than I expected and not very much profit.

  • 20 BritinKiwi December 13, 2013, 5:00 am

    In the early 2000’s, well before the boom in value and income shares, I’d popped a little in HFEL and it has done very well. It’s tempting to sell but given the actual return on that initial 3K with re-investment I’m happy to sit on it – or rather the equivalent in NZ$ as it’s on the stock market over here too.

    I’m tempted by the ETF’s – particularly from Vanguard that covers mid to large caps in emerging markets – VFEM – with TER of 0.29%. Complicated tax position though! But would help broaden and diversify in to other continents….

  • 21 Andrew December 13, 2013, 9:12 am

    I have followed this strategy with Vanguard VWO ETF, not trusting my ability to pick which emerging market would do well. However I got singed when the Fed hinted at stopping tapering back in May with emerging market indices dropping up to 17%. The assumption being that stopping off the cheap money means funds being withdrawn from those seeking higher yield in Asia and therefore lower equity returns. Any views?

  • 22 TCA December 13, 2013, 4:26 pm

    Having started with index trackers a year ago, one of which was Vanguard’s EM tracker, I’m now convinced I’d rather have active management for this sector. So sticking with investment trusts on this one. It might prove to be a bad move but time will tell.

  • 23 Neverland December 13, 2013, 5:03 pm


    I have been investing in emerging market funds for nearly 30 years

    They go through periods of being fashionable, just like any other market really, and then being really really unfasionable

    They are becoming unfashionable again in my view for the same reasons you identify but I would just keep at it on the basis that if the funds lose value and you invest regularly you can buy the same basket of securities more cheaply

    I just think that emerging markets are like the FTSE-100 on crack

    I remember being heavily invested in F&C Emerging Markets IT at the time of the Asian debt default in the 90s, followed closely I think by the Russian debt default and which led to the fund losing more than a third of its value and falling to a NAV discount of about a third

    …so that combined took it to less than half of the share price a couple of years previous….great

    That is pretty much par for the course with emerging markets (and developed ones too you could argue)

    When that trust merged with JP Morgan EM investment trust a decade later I think it had made about three times my average in-price and that wasn’t even a particularly well performing fund, everyone was just keen on emerging markets at the time of the merger

    Of course, past performance and the ramblings of old men is no guide to the future

  • 24 Alex December 13, 2013, 5:45 pm

    @BritinKiwi (Comment 20):

    Thanks for specifying the TER for the Vanguard FTSE Emerging Markets UCITS ETF (VFEM) – 0.29%. It seems Vanguard has reduced the TER: it was 0.45% the last time I looked at their ETFs. Good work by Vanguard.

  • 25 pkora December 13, 2013, 10:01 pm

    I hold emerging market funds but no commodity funds as they seem to move in tandem.Emerging markets is an area where active management seem to make a difference but going of a tangent all together, gold mining shares look even more unloved than emerging markets. Anyone interested in taking a punt on that as gold offres slight diversification to the emerging market space, i think.

  • 26 Greg December 16, 2013, 3:11 pm

    I’ve just noticed that Morningstar (US) is having an EM week, with a bunch of (probably quite good) articles:


  • 27 Jeff December 16, 2013, 5:20 pm

    The use of an exclamation mark was the kind of typo I sometimes get using a tablet. My top 5 holdings are AAS, SST, AAIF, TEM and JRS,

  • 28 Bob December 17, 2013, 10:39 pm

    I thought I might give you some feedback on your website…….
    Your website is superb. I read it religiously. It features some of the best researched and most informative finance pieces that I’ve come across – and I read a lot. Your style of writing coupled with the relatively brief yet well linked articles make it very engaging. Thanks.

    Whilst I like the odd lifestyle piece, I prefer the more technical articles. I’m glad you stay away from the MMM style (hearing about his loft insulation and mobile phone plan doesn’t really yank my chain)

    I understand the slight reluctance in airing your active investing views wishing instead to focus on the passive mantra however, please carry on with articles like the above. They add a great deal.

    Thanks again. I realise the work that must go into this site. Your efforts are well appreciated.


  • 29 emanon March 14, 2014, 5:50 pm

    I spoke with TD earlier today, the Blackrock Emerging Market fund is now closed due to reaching a limit?

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