Emerging market / small cap fund/tracker recommendations

El_Selb

My portfolio breakdown is roughly

- 10% 1 x individual stock
- 20% HSBC FTSE 250
- 70% Vanguard 80

Not a huge amount, £5500 in total.

I'm thinking about putting my next £500-600 amount into a EM or SC product to take on a bit more risk and hopefully counter balance the FTSE 250, which hasnt been doing so well since I bought it in the spring.

Are there any that people would recommend currently? This could give me a starting point for further research.

I've been thinking about JPM India, although potentially heart ruling my head a bit and wondering whether the sizeable returns have already been made in the wake of the election. Still though, if Modi delivers there will be more returns there.

Probably the most sensible thing to do is put into in the Vanguard 80 but I don't make the best passive investor sadly...

Thrugelmir

What's the individual stock?

brendon

IEEM IShares MSCI Em gives you fairly good coverage of everything.

Type in the terms 'MSCI' and you'll find trackers for all regions of the world -- general ones covering emerging markets, or more specific ones for China or India, for example. Read the Key Information Document before you invest, as many of these funds use swap-based replication. I invest in some of these myself, but you need to make your own decision about risk.

Totton

Why not switch to VLS 100 and add the £500 to that, you'll increase your risk.

bowlhead99

I have JPM India, investment trust version (JII) which is currently on about 10% discount.

I have no plans to sell, but clearly it isn't as strong a buy as it was. It's gone up a nice 30% over the last 6 months, while the FTSE 250 is up zero. So yes you've already missed a bunch of gains by not being in it, although you've also missed some losses which it suffered since its Q3 2010 peak along with other emerging markets, and so clearly the recent gains doesn't mean future gains can't keep happening.

The IMF and World Bank reckon the Indian economy along with China and other bits of Asia will have significantly more GDP growth over the next half decade than other emerging markets like Russia or Brazil or South Africa. Of course, these forecasts are visible to all and it's difficult to project to what extent it's all already priced in.

A word of caution, piling into what has just gone up a crazy amount is pretty much what you did in spring when you chose to buy a specialist single country developed market index (UK FTSE 250) that had gone up 50% in 2.5 years instead of the specialist single country emerging market index (JII) which had fallen 20% in the same time period.

Et voila! over the next 6 months, JII rebounded 30% while UK FTSE 250 bobbled around a bit but has basically gone back to where it was back in Feb. And now you're unhappy with your midcap UK fund that was flattish for the short term so you are looking for another exotic single country fund in an emerging market to try and grab gains there.

Clearly buying something to try to offset a fund that 'hasn't done well since the spring', because its total return went a bit flat, when actually the TR of that index that 'hasn't done well since the spring' has TRIPLED in value since March 2009, or QUADRUPLED in the last 11 years, means you are just looking too much at the short term - fashion investing, if you will. To be honest, yes I agree you're in danger of letting heart rule head.

I wouldn't say JPM India is an entirely inappropriate fund, but you're thinking to yourself - "ooh if Modi delivers then I could make some nice money". Well sure, but if other sectors deliver more than the market expect or less badly than the market expect, then you could make some nice money there too. If Modi only does as well as the market expects, then you won't make much, because it will have already been in the price.

That's the problem with picking one sector over another. You already access global largecap investments (including largecap EM) through Vanguard indexes so presumably you believe that many markets are fairly valued. But now you're tinkering round the side to try and beat them at their own game. You might win or you might not. But if you just generally want smallcaps or generally want EM, then a single country fund is maybe not the way to go and a more generalist fund that isn't tied to a single economy, would be worth looking at.

Other EM funds I hold include Scottish Oriental Smaller Companies (SST) - the discount is pretty low again now but I mention it because that's both EM and SC, two areas you were considering, and I've done well from it over the years, particularly buying in at a discount, selling out at a premium and rebalancing into other funds moving in the opposite directions. As the name implies it has an Asian focus and is managed by First State. However, it is way too focused for your three fund portfolio - if you had a big portfolio it could take up a few percent but at only £5500 it is not worth messing about with super specialist stuff.

For larger-cap EM, again an investment trust, I like Templeton Emerging Markets, who have a good long term track record in the sectors. Franklin Templeton also have a Frontier Markets fund I hold within my SIPP, although in my ISA I use Advance Frontier Markets which is a fund of funds structured as an investment trust.

Personally I do think EMs and smallcaps are better accessed through active funds than simple indexes, but if you just want general exposure to smaller global companies and emerging country indexes, you could just get the global smallcap index fund from Vanguard and similarly for EM index (or the iShares equivalents mentioned by Brendon). Different people have different views. Or if you just want to tick up the risk generally, start buying VLS 100 instead of 80 as Totton mentions. I use VLS 100 together with a strategic bond fund rather than VLS 80 as I'm not particularly interested in having a fifth of my fund just tracking gilts downwards.

El_Selb

My individual stock is IP Group. Hasn't been a good month.... Still rated as hold at worst though.

Thanks for the fund recommendations and particularly Bowlhead for your detailed answer. Simplest thing would probably be to switch to the VLS 100 as suggested (and maybe look into a strategic bond fund too). Whether I'll be able to resist having a bit more of a tinker though I'm not sure.

I'm going to look further into the various funds/trusts mentioned, and the merits of the different products - trackers/funds/ITs. It does seem wise to chose a more general fund that isn't tied to a single economy; although I do fancy taking a little 'punt' on the Indian market so will have to see if my head/heart wins out there. I've got a strong interest in India, but that's probably not a rational basis on which to make an investment decision I know.

As I learnt when buying my first bunch of assets in Feb/March, there are no set answers and nothing is guaranteed. I just need to read up a decent amount and go for it.

El_Selb

Totton wrote: »

Why not switch to VLS 100 and add the £500 to that, you'll increase your risk.

There's not actually a lot of different in performance though, from what I can see?

If the 20 portion of VLS 80 is tracking gilts downwards, how/why does a strategic bond fund avoid that? Is it investing in bonds in different markets?

bowlhead99

El_Selb wrote: »

There's not actually a lot of different in performance though, from what I can see?

The funds haven't been running very long and the 80% fund is going to be driven primarily by the 80% of its holdings that are the same as the 100%. During that time the bonds have been making a small and generally positive contribution.

Over a longer period you would see the disparity open up, particularly when bonds and equities were not moving in the same direction. But they will always be 80%+ correlated.

If the 20 portion of VLS 80 is tracking gilts downwards, how/why does a strategic bond fund avoid that? Is it investing in bonds in different markets?

Yes - broadly, a strategic bond fund uses its own strategies and active management to decide when to be in gilts versus investment-grade corporate bonds vs higher yielding corporate bonds vs index linked debt instruments which may be in a variety of currencies and credit rating and a variety of maturities. The yield and capital movements on these classes could be quite disparate at a point in time and will shift over short and medium and long term economic cycles.

At present I would not hold a long dated UK gilts fund tracker, as the downside compared to cash is significant, nor a short dated gilts fund tracker because the returns vs cash is not good enough. However, some other bonds in different countries and from different types of issuers are relatively more attractive IMHO.

So, I'm more willing to take a punt on an active manager - who can monitor markets and take decisions and try not to lose my shirt for me, by constructing what he hopes to be the optimal fixed income holding at a point in time considering capital and income gain/loss potential, liquidity, currency etc - than i am to just buy a static basket of bonds that I believe to be overvalued...

Ryan_Futuristics

I think we've all, at some point, made the mistake of chasing past performance and finding ourselves late to the party - bowlhead put it all excellently

There's also a lot of "Just stick it in a low cost tracker" advice going around these days - and while that may have worked well from a specific point in 2004, there have been many points in history where you could have been waiting decades to claw back losses from doing that

You need to start thinking about value ... The FTSE 250 has been overvalued in recent years, so it's likely to want to revert down towards its mean ... The FTSE 100 still looks slightly cheap ... This is why investors like Neil Woodford are building their portfolios around Large Caps which pay good dividends

I'd say avoid bond funds ... The yields are low and they're priced very high –!so it's the opposite to value investing - they're likely to go down (I'm skeptical how well strategic funds will cope too)

I think most of us are expecting some kind of market correction soon ... So more defensively positioned, large cap, high dividend paying companies might be a safe bet (income could also cushion any market loses)

Personally I like Newton Emerging Income and Newton Asian Income ... Lazard Emerging Markets and First State Asia Pacific Leaders could be worth trickling money into for longer-term growth too (I agree active managed funds should be in a better position to spot opportunities)

But work out your asset allocations and invest into them all monthly and autonomously - human instinct is always the biggest risk to your investments

jk451

This probably won't be as easy answer as you like, but here are some things that you may/may not be thinking about:

1) You may want to think about adding something different than stocks. In these days most stock markets, including the EM ones, are highly correlated and although it might look like British blue chip company stocks and EM Indian stocks are so different, most of the time there is a big proportion of institutional investors holding both and all in they tend to buy and sell them both at the same time, hence the high correlation.

The correlations tend to increase in time of crisis. So you might be relatively happy until the next crisis when all of a sudden all your components will go to the ground in one go.

2) So what should you look at instead? I am not making a concrete recommendation, but you should at least have a look at various types of commodities (especially things like grain have price correlated to inflation strongly in theory and it is somewhat true in practice as well). Normally I would say bonds as well, but again (not making a concrete recommendation) I would be careful about buying bonds at this time because bond prices are at the highest over a very long period due to various reasons.

If you like risk and EM, you might want to look at some EM currency funds as well that are just proxy for currencies such as INR. Yes, this does go into a more speculative territory, but that's where you get into when you take on more risk.

Last but not least be careful about sizing your position in a risky component of your portfolio. Look at how bad it was over the past 5 years, double the impact and ask yourself if you would be able to be OK with that. I've seen many people get badly burnt because they take on too much risk they are not aware of, speaking of institutional investors (rather than individuals).

I know it's a lot more work than putting cash into an EM stock but when the next crisis hits you may feel the reward.

El_Selb

I ended up putting £500 into Lazard Emerging Markets a few weeks ago; it's been doing pretty well since.

I've been watching JPM India for a while now and in this time it's been doing well (so I've probably missed the returns already I guess) - still tempted to put some money into that. Although what I should do is buy some more Vanguard/established market products before going into exotic areas in order to moderate the risk level. Whether I do or not...

Another thing I need to investigate is re-balancing my portfolio...maybe I don't need to do it just yet although I will in time.

And I'm also thinking about switching funds from a FTSE 250 tracker to Royal London UK Mid-Cap Growth Fund as it seems to be a better performance investment in the same sort of area.