Emerging Markets Mutual Funds

A good means of value investing in emerging markets?

Emerging markets mutual funds invest in countries that have recently industrialised or become free markets.

Investing in this type of fund may be of some interest from a value investing perspective, but most likely through specialist "stock-picking' funds.

Emerging markets are becoming recognised as a separate asset class in some countries.


Emerging Markets Countries

The countries of interest would be seen as progressing toward becoming advanced, as evidenced by some liquidity in local financial markets and the existence of some form of stock exchange and regulatory body.

These countries will typically have a financial infrastructure including banks, a stock exchange and a unified currency but may not have the level of market efficiency and strict standards in accounting and regulation as with advanced economies.

Emerging market funds are commonly grouped in the 'alternative investments' category with investments such as ...

• hedge funds
• private equity
• venture funds
• infrastructure funds and
• high-yield investments.

They are sought by investors for the prospect of high returns related to faster economic growth.

However, accompanying higher returns are increased risk factors that may include some combination of political instability, domestic infrastructure problems, reduced liquidity and currency volatility.

Superannuation funds have led the way into emerging markets and view them as long-term investments.

Exposure as an investor may be gained through specialist emerging markets managers with some funds tracking the Morgan Stanley Capital Investment MSCI Emerging Market Index.

Other emerging market funds that are available include 'benchmark-unaware' funds. These are funds managed without reference to a benchmark, sometimes referred to as 'stock-picking' funds.


To Conclude

Because of the difficulty in investment in emerging markets from afar, investing in emerging markets from a value investing perspective would most likely be through specialist 'stock-picking' funds.

A number of these emerging market mutual funds profess a value investing approach.

However, because of the increased risk, I limit my exposure to 5-10 per cent of my portfolio.

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