Emerging markets fund recommendation?

stoozie1

Hi,

Our portfolio is split approximately 50% cash, 50% S and S (all VLS 100% equities at the moment)

I am wondering about adding an Emerging Markets tracker.

Any thoughts?

jamei305

If you just want a tracker there's not much thinking to do

There is Vanguard Emerging Market Stock Index and Fidelity Index Emerging Markets which both track the MSCI Emerging Markets Index. Then there's iShares Emerging Markets Equity Index and Legal & General Global Emerging Markets Index which track the FTSE All-World Emerging Index.

The main difference is that FTSE All-World Emerging Index doesn't include South Korea, so probably best to go for a tracker that follows that index since SK is included in VLS100.

But really there's not much between them, don't spend too much time on choosing.

ColdIron

VLS100 has just over 8% in EM, another way of thinking about it is that 1 out of every 12 units is already invested in EM. If you like the Lifestrategy 100 but think that Vanguard's allocation is wrong (for you at least) there is an obvious logic in buying more of the Emerging Markets tracker that you already have. However be aware that it will reduce the proportion of investments in Japan, Europe, Asia Pac etc

bowlhead99

stoozie1 wrote: »

Hi,

Our portfolio is split approximately 50% cash, 50% S and S (all VLS 100% equities at the moment)

I am wondering about adding an Emerging Markets tracker.

Any thoughts?

My general thoughts are

- you know do already have an emerging markets tracker within your VLS100's underlying holdings, yes? But you're just looking to increase the exposure to those markets?

- if your VLS100 is held on Vanguard's own cheap platform it may be more convenient for you to use a vanguard product rather than one from a rival manager which would require a different platform. They offer a tracker and an active option (the latter with external management) though the latter does not have any real track record.

- I generally prefer accessing less-developed markets through active rather than tracker funds as where markets are not efficient, it can be worth paying someone to do their own bottom-up research to evaluate which companies have better prospects for their price. So, I don't have much in the way of recommendations for trackers other than, as jamei said, decide what index you want to track between the two main index providers MSCI / FTSE and pick one of the options with low costs and low tracking error. Physical replication of the index is preferred to synthetic, given cost differences are small these days.

Voyager2002

As Bowlhead says, there are arguments for using active management in emerging markets. Personally I find these arguments convincing, and prefer to obtain exposure to these regions via actively managed investment trusts. My main holdings are in the Schroders Asia Trust; a US-based IT that covers India alone; and the JP Morgan Brazil investment trust. (I do not like the options that I have seen covering China; and while I would rather gain Russian exposure via an IT I currently hold some mutual funds that concentrate on this market.)

Obviously Latin America is far more than Brazil, but all the investment vehicles that I have looked at give so much weight to Brazil that the role of other countries in the region is marginal. And it seems clear that when a very high percentage of an actively managed fund is invested in one country, virtually all management attention will go to that same country.

stoozie1

bowlhead99 wrote: »

- I generally prefer accessing less-developed markets through active rather than tracker funds as where markets are not efficient, it can be worth paying someone to do their own bottom-up research to evaluate which companies have better prospects for their price.

Thank you. I had thought that adding something active would be illogical, but this makes perfect sense!

Re: your other point. I vaguely knew the composition of VLS 100, but clearly not in a very 'joined up thinking' way!

stoozie1

Voyager2002 wrote: »

As Bowlhead says, there are arguments for using active management in emerging markets. Personally I find these arguments convincing, and prefer to obtain exposure to these regions via actively managed investment trusts. My main holdings are in the Schroders Asia Trust; a US-based IT that covers India alone; and the JP Morgan Brazil investment trust. (I do not like the options that I have seen covering China; and while I would rather gain Russian exposure via an IT I currently hold some mutual funds that concentrate on this market.)

Obviously Latin America is far more than Brazil, but all the investment vehicles that I have looked at give so much weight to Brazil that the role of other countries in the region is marginal. And it seems clear that when a very high percentage of an actively managed fund is invested in one country, virtually all management attention will go to that same country.

Thank you, that is very interesting.

Is it China specifically at the moment of concern, politically, or just these funds?

IanManc

stoozie1 wrote: »

Thank you. I had thought that adding something active would be illogical, but this makes perfect sense!

Re: your other point. I vaguely knew the composition of VLS 100, but clearly not in a very 'joined up thinking' way!

What doesn't make sense to me - and I'm really wondering, not having a go at you - is why when you've chosen a global self-balancing product like VLS100 you should then decide to tilt your investments towards emerging markets.

VLS100 is already tilted towards the UK as it has UK investments of approximately 22% when the UK makes up roughly 6% of the world market by value.

Seeing VLS100 already has an emerging markets component, is there some sort of strategy behind your wanting to add to that?

If there isn't then you might prefer not to start tinkering.

stoozie1

It was a change prompted by Hans Rosling (being serialised on radio 4) which made me think about the developed world bias of funds and question whether that makes long term financial sense. Chapter 3 aired yesterday if anyone is interested.

IanManc

stoozie1 wrote: »

It was a change prompted by Hans Rosling (being serialised on radio 4) which made me think about the developed world bias of funds and question whether that makes long term financial sense. Chapter 3 aired yesterday if anyone is interested.

Right, I understand.

Global funds, or indeed a tied funds of funds that follows a specific investment strategy like Vanguard Lifestrategy, will invest in proportion to the amount that a particular county's index makes up of the world market, by value.

As emerging markets increase in relative value - if they do - then Lifestrategy would rebalance accordingly.

It depends whether or not you think that investing according to value proportionate to world markets is "bias" I suppose.

If you'd bought a basket of regional index funds yourself then they would go out of balance against value if you didn't rebalance them yourself, but you've bought a fund of funds that rebalances itself, albeit with a UK tilt.

There will always be bits of information and opinions which make you question your strategy because there is always more to learn about investing, but you can't adopt all of them, and often they will conflict anyway.

Prism

Another thing to take into account is that most of the global companies that are well represented in most funds already make a significant amount of their revenue from emerging markets. For example, on Unilevers website it states that 58% of their business is from EM. If you look at British Americans Tobacco recent financial report, they made 4bn from EM and only 2.5bn from the US and Western Europe in 2017. These two are 3rd and 5th on the FSTE 100. There are many more examples.

So simply by being invested in global companies you could say you are invested in EM. Not to say that you can't and shouldn't also invest directly in EM funds but you may find you are more exposed to the EM market than you think you are.