Emerging Markets - Opinions Pls

colinjd

Hi,

Doing some research for a portfolio re-balance in the near future and have my eye on one of the following and would welcome anyone's opinion, if you have experience with any of them:

Fund - Blackrock EM Equity Tracker - AMC 0.62% - benchmarked to FTSE All-World EM index

ETF's - HSBC, iShares & SPDR - 0.60%, 0.75% & 0.65% - all aligned to MSCI EM index

One question that comes to mind, if the three ETF's are all aligned to the same index, should performance (and therefore result to me) be the same and is the only difference a question of cost?

The ETF costs also have to include my HL dealing fee and 0.50% AMC, so is that right that all of the ETF's mentioned are more expensive than the fund? I thought ETF's were supposed to be cheaper?

fyi, looking at an initial £1500 investment.

Thanks for looking.

jamesd

Emerging markets are one of the least appropriate areas for tracker funds. Are you sure you really want to go passive or only passive in this area? All of those also seem to be cap-based indexes, with amounts of each company held decided just by how big the company is. Probably not really the best way to pick what to hold the most of.

Tracking error and whether the ETF is synthetic or not also matters, it's not just about price even for ETFs. For a synthetic ETF you can find if there's a default that your emerging markets holding was really secured by Italian government bonds and you don't have any real exposure to emerging markets other than that provided by the derivatives of the now-bankrupt counterparty. This makes the synthetic ones significantly more risky in times when major market disruptions and counterparty failures are possible.

Funds tend not to have much synthetic component. The price they pay for that can be higher tracking error and higher costs. As usual, safer has a price.

dunstonh

Fund - Blackrock EM Equity Tracker - AMC 0.62% - benchmarked to FTSE All-World EM index

That is the commission paying one. The clean one is 0.28%. So, whoever you are looking to buy that through is being paid commission of around 0.4%

I thought ETF's were supposed to be cheaper?

No. Thats an out-of-date myth. Platforms tended to retail some clean options as a loss leader with cross subsidy coming from packaged retail funds. Now that OEICs/UTs are moving to clean from retail pricing, the existing clean loss leaders will effectively be going up in price as they no longer benefit from the cross subsidy.

colinjd

dunstonh wrote: »

That is the commission paying one. The clean one is 0.28%. So, whoever you are looking to buy that through is being paid commission of around 0.4%

I'd forgotten about that, so thanks.

As my ISA is with HL I'm probably stuck with the 'dirty' class until they decide what they're doing, price-wise, and make the clean class available. Probably won't be for a good few months yet though.

Perelandra

It won't make a big difference, but as of 1st May the AMC of the "A" class was reduced, so now the total charge will be "only" 0.55% instead of 0.62%:

http://www.trustnet.com/Tools/PDFViewer.aspx?url=%2FFactsheets%2FFundFactsheetPDF.aspx%3FtypeCode%3DFKVG0

Blackrock has recently informed us that the 0.55% Annual Management Charge of Blackrock Emerging Market Equity Tracker Acc will be decreased to 0.5%

I would echo jamesd's comments about the suitability of trackers for Emerging Markets, but that's only my personal opinion of course.

colinjd

Perelandra wrote: »

It won't make a big difference, but as of 1st May the AMC of the "A" class was reduced, so now the total charge will be "only" 0.55% instead of 0.62%:

http://www.trustnet.com/Tools/PDFViewer.aspx?url=%2FFactsheets%2FFundFactsheetPDF.aspx%3FtypeCode%3DFKVG0


I would echo jamesd's comments about the suitability of trackers for Emerging Markets, but that's only my personal opinion of course.

It's opinions I'm after, so thanks. I'm trying to soak up as much information as possible so comments regarding possible lack of suitability have caught me a bit by surprise.

Care to elaborate?

Perelandra

colinjd wrote: »

It's opinions I'm after, so thanks. I'm trying to soak up as much information as possible so comments regarding possible lack of suitability have caught me a bit by surprise.

Care to elaborate?

Ha... the ongoing debates about passive vs active for emerging markets are nearly as numerous as passive vs active in general.

There's a few reasons, but the strongest one for me is that passive funds work best in developed/efficient markets, like the UK or US. For markets which are not so analysed, there are more opportunities for active managers to find undervalued companies. It's therefore easier for active management to outperform sufficiently to justify their fee.

I'm not a strong active-managed fund advocate. The majority of my equity investment is in passive funds.

From the quote I gave above, you can probably guess that I do hold some of the Blackrock passive fund. I've actually got this as a control (probably a misguided idea!) to actually monitor more easily the performance of this versus active- a real-world test of the decisions I would make in 2013 if I were to go for an active or passive approach to EMs.

bowlhead99

colinjd wrote: »

I'm trying to soak up as much information as possible so comments regarding possible lack of suitability have caught me a bit by surprise.

Care to elaborate?

Apologies in advance for lengthy post, mostly cut/paste from what I've written before. The argument for passive investing goes as follows:

- The efficient markets hypothesis means everything is already factored in the price because of perfect quality and timeliness of information and if things outperform it's only because they are inherently risky and can underperfom to the same degree.

- The market is the result of all the decisions made. For every person on the winning side of a trade, there is a loser. On average, things might grow at an 'average level'. The active decisions to be 'overweight' in a particular stock versus the existing market capital of all companies, will only work out for the best, half the time. Most investments are made by institutions and market professionals. Half of them are beating the average position and half of them are being beaten by the average position.

- You can have no idea which active managers will perform better or worse than the average.Consequently you might as well just buy an average position weighted by market capital (i.e. a dollar invested is split over all opportunities in the market, in proportion to how much market cap is available from all the companies). As the market is perfect, the only differentiator in the funds that makes a difference over time is the level of fees and you should seek to just buy the average basket at the minimum cost.

- In doing so, you will achieve the 'average' return when defined in those terms (i.e. when measured by the return that every dollar in the market achieves - there are more dollars in the largest companies therefore the 'average' return is skewed to what the larger companies achieve - for better or worse). This might be wildly different from the return generated by putting equal amounts in all companies but matching it will save any embarassment when 'the index' goes up by 20% and your selective basket only goes up 5% that year. Stay safe and keep up with the (albeit badly defined) average rather than beating it one year and losing to it the next.

So, in perfect markets with good information flow, just buy a general exposure via a tracker. It should do OK, and while you might be horrendously overweight tech stocks in the crash of '99/2000, or similarly, financials in 2007/08/09, where they were a large component of the index, it will hopefully be made up for by the bullish runs along the way. There is no way to beat a market when all companies are transparent about their performance and are publicly scrutinised and analysed like the FTSE100 and S&P 500. Just buy trackers. So the theory goes.

The fundamental premise of this starts with high quality information available to all on a timely basis. This is not what you find in Emerging Markets, at all. Standards of corporate governance and timeliness of transparent financial data in China or Russia are incredibly far behind the developed markets. Consequently there is a huge advantage in having a large established Emerging Market research team at Templeton or Aberdeen or wherever, than having a guy pick stocks based on the available market capital following an index and giving it no critical thought.

Now, there are thousands of so-called EM managers. Every man and his dog wants to say they have great connections to a rich family in China or Russia or a sheikh in the Middle East and can find you a great deal through their family and networks. Many of them are right, sometimes, because there are a crapload of opportunities in such markets. But there are more people holding themselves out to high net worth investors as 'private equity fund managers' in China than there are listed companies. There is a lot of bull to sift through.

An index is not great for sniffing out high growth low risk opportunities amongst the various financial promotions, new listings etc and identifying overvalued bubbles. A lot of managers can keep a profitable existence simply because of the weight of cash coming into the sector - people just want to get 'exposure' to such high growth geographical regions and don't care what they are in, as long as it does similarly to the index. So there are a large number of mundane fund managers who on average do badly but stay in business just because the region is creating more growth than the west and the investors are OK with mediocrity or bottom quartile performance.

You do not want to merely keep up with this mediocrity and follow a dumb index. In these markets, review of historic performance through boom and bust cycles can identify active managers with good continuous track records and sort the wheat from the chaff - i.e. who has a good team and a sound strategy and local knowledge? - , to an extent not possible in FTSE100 or S&P 500 where there is more luck and variance between quartile performance for a given manager from one period to the next.

So, in summary, picking a solid manager in the EM sector is not too difficult and while past performance can't predict the future, it can be more indictive of manager skill and risk management than is the case in the developed markets.

Another way of looking at it, is that the whole point of going to Emerging Markets is to access high growth, literally 'emerging' businesses in high growth 'emerging' economies which start small and make it big if given long enough as consumers get richer and the export markets mature. Do you get anything like this if you use Vanguard Emerging Markets tracker at only 0.55% TER?

4% of your MSCI EM index is Samsung. It's a $200bn electronics giant which competes with Apple (mainstream developed business listed in US) and Sony (mainstream developed business in Japan). Most of its sales are not in its home location of South Korea. Of course, sales of Sony or Apple or Coke or whatever are not all to their own home countries, big business is international these days. But 4% in one global electronics giant is probably not the emerging market niche you sought to chase. In MSCI Emerging Markets, 16% of your cash (160 in 1000 pounds invested) goes into just ten companies - monster companies in limited sectors like tech: Samsung, Taiwan Seminconductor, China Mobile; resources: Gazprom, Petroleo Brasileiro; banks: China Construction Bank, Bank of China, ICBC.

These companies might have good prospects (because of population growth and industrial demand) but they are hardly the unknown companies of tomorrow. They are well known corporate monsters with profiles and prospects similar to what you already have in your global trackers. They might feature in an index, and a less volatile 'emerging markets leaders' fund, but they are not my idea of capturing the untapped growth that can come out of emerging and frontier markets over the next 20 years. To do that, requires research, active management, and an inevitably higher managment fee.

Perelandra

Nice response, bowlhead99.

colinjd

Good stuff bowlhead99, interesting insight and plenty for me to ponder.

To summarise, the traditional industry definition of EM is based on geography alone whereas you would recommend considering geography AND company size, and it's this additional research that creates the additional costs.

You get what you pay for, I guess?

Thanks again.

bowlhead99

In an efficient developed market (longstanding arguments between fans of passive vs active investing aside) it is easier to accept the view that there is no rationale to do anything other than deploy your cash into the most easily investible (largest) companies whose returns are most correlated with the market return (because they make up most of the market). Because everything is fairly priced anyway.

In inefficient undeveloped markets, everything is not fairly priced and it's therefore extremely important to buy the companies that are fairly priced or underpriced. While you can get the "market return" by buying "the market", the best managers will significantly outperform the market and there is greater disparity between good and bad managers.

I'm not saying you must diversify by company size and indeed Samsung might be very fairly priced. But it is important to find the companies which have a good combination of potential growth and attractive price, because there is a lot of garbage and the people you are buying and selling from might have more information than you, putting you at a disadvantage if you go in with your eyes closed and throw money at the dartboard and simply end up with the largest amount of cash in the largest buckets. Paying for manager skill, insight and risk management in such markets would seem to be much more valuable than in developed markets and the standard arguments for pure passive strategies are weaker.

You mentioned EM indexes MSCI vs FTSE.
FTSE considers South Korea as developed, like other developed Pacific countries - Japan, HK, Australia, or Europe, USA, Canada.
MSCI as mentioned says South Korea is Emerging and puts it in the EM tracker alongside Russia, China, Brazil.

There are obviously different views on which is the appropriate classification. For you, might not matter much but just know what you are getting.

For example the popular portfolio fund-of-tracker funds, Vanguard Lifestrategy has one component being a global developed ex-UK index, and another being an EM index. But their EM index is MSCI, including Korea, and their global developed is FTSE, including Korea. So you get a double whammy of Samsung.... May be a good or bad thing depending what you want. It helps your Samsung component get up towards what you have in Apple, I suppose.

Having an S&P 500 tracker and also a global ex-uk index would likewise double up on the major US companies which sit in both. Nothing is 'wrong' per se because who is to say the index creator has it right to put all your money so heavily weighted into the big hitters in the index. It might be right or wrong for you, depending on what you want and how the companies perform.

Good luck with your investments. To your final point - you get what you pay for? Only if you are successful in picking a good manager. You might pick an expensive one that turns out to be rubbish. By going for an index you are guaranteeing you won't beat the index, so you don't need to pay for "outperformance" - you're guaranteed not to get it. I just feel that there is a better chance of picking a long terms winner in markets where managers have real scope to win. In developed markets, the have much less scope to win long term and it may be an exercise in futility to pay out more cash hoping you find a winner.