When is an emerging market not an emerging market...?

Bimbly

...when it's in the Emerging Markets equity fund in my pension!

What do you think the biggest holding in this fund might be. China, maybe?

No, it's the USA!


For me, the whole point of investing in emerging markets is investing in emerging markets! Especially as the USA rather dominates a developed world tracker. Putting a little bit in an emerging market fund allowed me to diversify away from that. Or so I thought.

I've just come on here to moan about this, really. I'm not sure what to do about it. My preference would be to invest all my equities in a whole world tracker and be done with it, but my pension provider doesn't offer that option. I have to go with World-ex UK, plus UK, plus Emerging Markets (which make up 5-10% of my equity investment). This is a DC fund linked to my employer and I'm invested quite aggressively as it's in addition to my DB fund which I'm still paying into.

The EM fund I'm currently invested in is among the "select" funds offered by the scheme, charging 0.45% fee and says "BlackRock state that the fund's objective is to achieve a return that is consistent with the return of the MSCI Emerging Markets Index.". The only other "select" emerging market fund is a JP Morgan one which charges 0.96% and the factsheet reveals it has 20% USA equities and 20% Hong Kong! I'm sure this is all to smooth volatility for the poor little pension holder, but I'm not impressed.

I can go to their "supermarket" of other funds, as it seems they have dropped the extra charge for doing so, and there are some more options there. There is one by Allianz with charges of 0.51% and the snapshot of its current investments shows the top holding is 33% China, plus others which I would consider emerging markets, although the factsheet states that "20% of the fund's assets maybe invested outside of emerging markets countries including developing economies...". There are a handful of other funds which charge 0.96%, some of which don't say anything about investing outside the sector. I would be tempted by one of these if I wasn't trying to keep the charges down - maybe that doesn't matter?

I'm thinking of switching over to the Allianz one over the course of the year, although I expect wise heads here will say don't bother. It's not a huge sum of money, but my current fund has under performed compared with other true emerging market funds I've looked at. This is all happening as it's the time of year when I take my annual assessment of pension fund and discovered I wasn't invested in what I thought I was invested in. I can't have a moan about this to any of my friends (because, oddly, they don't find pension investing interesting!) and so I'm moaning here.

JohnWinder

Yes, it should be about 45% China and 25% Taiwan and India. It's a bit shabby really, isn't it. But, they never promised you a cap weighted index fund, just a fund of their choosing with a name to deceive you.

Bimbly said:

I would be tempted by one of these if I wasn't trying to keep the charges down - maybe that doesn't matter?

Surely, it matters to the extent of the size of the cost difference, multiplied by how much is invested, multiplied by how many years left, compounded somehow to reflect anticipated growth.

Linton

Some of the largest Chinese tech companies are quoted on US stock markets so there may be nothing remiss. It would help if you told us the name of the fund.

cloud_dog

 I'm not sure China still falls under the EM concept.  I appreciate it may fall under the definition of the defined index but, even so....

Linton

cloud_dog said:

 I'm not sure China still falls under the EM concept.  I appreciate it may fall under the definition of the defined index but, even so....

China is EM according to the Indexes, though some (many? all?) have a surpisingly low % allocation as access to some Chinese stock markets is limited.  Other MSCI EM countries include Russia, Hungary, Poland, S Korea, Taiwan, Saudi Arabia, UAE

EM  really need redefining, but I guess the consequences on funds throughout the world would be too fundamental for this to happen.

BritishInvestor

Linton said:

cloud_dog said:

 I'm not sure China still falls under the EM concept.  I appreciate it may fall under the definition of the defined index but, even so....

China is EM according to the Indexes, though some (many? all?) have a surpisingly low % allocation as access to some Chinese stock markets is limited.  Other MSCI EM countries include Russia, Hungary, Poland, S Korea, Taiwan, Saudi Arabia, UAE

EM  really need redefining, but I guess the consequences on funds throughout the world would be too fundamental for this to happen.

Would you class Russia as developed?

barnstar2077

Best to look at the holdings in a bit more detail I think.  Those percentages don't tell you much really.

dunstonh

There are different approaches and this applies across the board, and not just to EM funds.  Some funds will have a remit to only invest in companies that are based within their region/country or, in the case of EM, countries they define as emerging markets.   Others will have a remit that allows them to invest in companies that have significant volumes of trade within those countries, regions etc.  Those companies may be registered on the stockmarkets of other countries.  

I've just come on here to moan about this, really. I'm not sure what to do about it. 

Its not really worth a moan as its an opinion by a fund house to run their fund that way. If you dont like it then pick a fund that doesn't do it that way.
Personally, we prefer to use funds that invest in companies in that region/country.  So, we add a filter on our research to only show funds that are above 85% of the fund meeting that criteria.   You cant really set it to 100% as there are companies that brass plate in the west and you would eliminate them if you did that. 

If you use a restricted provider (which is usually the case with a workplace pension) you may not have much choice and have to go with the best of what is available.

[Deleted User]

Yes, its a major deficiency for a fund. 

It does not matter if South Korea or Taiwan are truly “Emerging”.  What I want is a fair slice of everything. Already have a slice of US companies. No need to duplicate. 

Incidentally, South Korea is treated as “Emerging” by some indices and as “Developed” by others. So, index investors have to be careful to avoid duplicating or missing out. 

El_Torro

I don't think an Emerging Market fund with 14.1% invested in the USA is cause for big alarm. It could be that the fund is focusing on companies listed in the US that heavily trade with Emerging Markets. Of course it's also possible that the fund manager just decided to chuck some Apple and Facebook shares in the mix. If it concerns you that much you'll need to research the fund some more.

As for China being an Emerging Market, I can see the case for it. Sure, China is an economic power house. Still, investing in the Chinese stock market isn't as straightforward as in Western markets, the Chinese stock market is subject to different regulations, which can skew results. The Chinese government is not particularly scared of intervening in the economy when it suits them.

Prism

It is likely that it is simply the way it is being reported - country holding the listing rather than country holding the head quarters. Lots of emerging market funds get some of their exposure through the US stock market to companies like TSM, Alibaba, Baidu and MercadoLibre.