Emerging markets funds have arguably been the growth phenomenon of the 21st Century. Led by the powerhouses that are the Chinese and Indian economies all the emerging markets have seen unprecedented success, which has meant superb returns for investors too.
The social, political and economic factors behind the growth of the emerging economies were not immune to the recent global recession however. Growth slowed significantly, although an actual recession in these countries was never likely.
Because of this strong grounding in economic growth it was the emerging economies that enjoyed the fruits of a market recovery through 2009. The numbers say it all:
In the last 12 months the MSCI Emerging Markets Index went up by 72.9%. In the twelve months before that it went down by exactly 50%. In the three twelve month periods before that it went up each time by 37.8%, 28.4% and 34%.
It’s easy to see how the higher return that this type of investment provides goes hand-in-hand with higher levels of risk that the capital values can also fall dramatically. This is the typical risk and return trade-off you would expect from a higher risk investment i.e. the higher the risk the higher the potential return.
Because of this it’s important to get a balance with your investments. The best way to put together a suitable set of investments is to invest in a mix of different funds. This will ensure that your entire holding of funds will contain a balance of higher and lower risk assets, with money invested all over the world and in different asset classes such as bonds and shares. Emerging markets funds can certainly provide an important and potentially profitable investment and for that reason could form a vital part of your portfolio.
However it is essential that you consider your own attitude towards risk. That is, how would you react to a fall in the value of your investments? Would you be comfortable knowing that you have invested for the long term and that short term values don’t concern you? Or would you have sleepless nights worrying about whether you will get your money back?
Knowing and understanding yourself as an investor will save you a lot of grief in the long run. If you invest in a mix of assets that is in keeping with what you are happy with then you will be much more comfortable with your investments. Having an external assessment of your ‘investor profile’ by taking some wealth management advice could make all the difference.
So in considering whether you should invest in emerging markets it is more a question of getting the right balance of funds. In practice UK investors are most likely to be comfortable with a mix of bonds, UK equity, international equity, emerging markets and smaller companies funds. How much you invest in each of these will depend on you.