More than clever marketing shorthand, BRIC at least combines the “big four” emerging economies, representing some 40% of the world’s population.
However, it is the next stage of development in the likes of Mexico, Turkey, Taiwan or Indonesia where fund managers often say they find the best growth opportunities.
Does it pay to have greater diversification? A quick comparison shows that arguably the two most prominent GEM funds, Aberdeen Emerging Markets and First State Global Emerging Leaders, have easily outperformed the two foremost BRIC funds, Allianz RCM BRIC Stars and HSBC GIF BRIC Equity, on a three-year basis.
Big discounts
Both BRIC funds also underperformed the IMA GEM average, and failed to beat the IMA Specialist sector in which they are categorised.
Still, as HSBC has pointed out, the BRIC countries are currently trading at an average discount of 30%. Interestingly, it is the relatively unloved Russia that makes up the largest overweight (31%) in the group’s fund.
Whichever way you chose to access emerging markets, volatility remains a primary concern. While the industry is keen to play around with acronyms, its investment approach remains relatively straight laced – emerging market absolute return funds have yet to find a place in investors’ portfolios.
Is there a clear path to manage downside risk in a long-only strategy? Michael Leithead, senior portfolio manager at EFG Asset Management, thinks a worthwhile strategy is to seek out equities bearing high dividend yields.
Dangerous generalisation
“Although it may be a dangerous generalisation, high dividend yielding stocks may have lower volatility characteristic because they are more mature businesses, generating excess cash flow relative to their growth needs,” he says.
“The other possibility is that they are deep value business, in which case they may exert less influence on overall indices. Whilst the former category may be considered dull to some emerging market managers, these companies are also likely to have exposure to the underlying economic growth. Whilst the deep value companies may well be more volatile, if properly evaluated they may offer superior returns.”
Regardless of your emerging market universe, whether it is four countries or 40, finding these high yielding stocks without risking investor capital is the hard part.
Michael Leithead’s article on managing volatility emerging market equities will feature in the June issue of Portfolio Adviser, out soon.
