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Why I’m buying into emerging markets in my pension for the first time

13 April 2014

FE Trustnet’s news editor Thomas McMahon is starting to drip-feed into emerging markets, having ignored them for a year.

By Thomas McMahon,

News Editor, FE Trustnet

I would class myself as an emerging market sceptic but have decided to start buying into the sector in my pension this year, taking my weighting up from absolutely nothing.

What to do with your emerging market exposure has been a big issue for UK investors over the past year, with poor returns from the area pushing investors to take out their money in increasing numbers.

Retail investors pulled over £100m from the funds in February, according to IMA statistics, with the sector one of only five to see net outflows. Asia Pacific funds saw even higher outflows of well over £200m.

Investors had high hopes for the region, having been told for years that it was an area to be in “for the long term”.

Being of a cynical disposition, I often wondered if what they really meant was “has done well over a recent long period”.

It is certainly true that up to the start of last year the long term numbers from emerging markets had been good, but more recent performance had been poor, and it really should have been clearer to more people that something was up.

The MSCI Emerging Market index struggled all the way through 2011 and 2012, which made it all the more surprising when the media narrative started to talk of a downturn at the start of 2013 – it had been going on for some time.

Performance of emerging market and UK equities over 10yrs

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Source: FE Analytics


When I came to put together my pension for the first time at the start of last year I was not convinced at all by the arguments for including it in a portfolio.

Most of the bull case seemed to revolve around economic factors such as demographics and GDP growth which have highly complex relationships with a number of other factors.

They are also intrinsically linked to political factors as well, which the salesmen will often gloss over and which have come back to bite us this year.

That’s not to say that I think emerging markets are inherently too risky, but my scepticism surrounds more this notion of an inevitable long-term rise of their economies.

There is a strong human tendency to expect things to develop in a linear fashion, and this is often not what happens.

I can distinctly remember the huge shift in the narrative towards emerging markets in the depths of the crisis of 2008 and 2009.

There was some quite laughable tosh spoken by high-brow commentators on how the West needed to follow the model of the Russians and Chinese. I imagine quite a few commentators on both economics and politics would be embarrassed to read back their words.

On top of this you have to question how much diversification you really achieve by buying most of the emerging markets funds.


Regressing the FTSE All Share against the MSCI Emerging Markets index in FE Analytics shows that over the past five years movements in the former have explained 62 per cent of the movements of the latter.

This means they have actually been slightly more correlated than the FTSE and the S&P: movements in the former explain 55 per cent of the movements in the latter over the same period.

The reason for this is that the process of globalisation is making geographic diversification less and less effective.

What you are buying with a major index these days is becoming more and more an index of multinational companies listed in a certain region but exposed to a number of markets.

Financial sectors are becoming ever more intertwined, while the sort of basic material and mining stocks that feature highly on the UK and Asian markets, for example, are highly dependent on the same factors.

Performance of Asian and UK mining sectors over 3yrs

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Source: FE Analytics


That said, there is no denying the fact that emerging markets are cheap, and there’s a lot of evidence to suggest that buying markets when they are cheap leads to greater long-term outperformance.

Of course, the issue to worry about is whether prices have further to fall. I find Dean Newman’s argument quite persuasive on this point.

He suggests that when earnings start to be revised upwards we’ll see appetite return to the region, and he thinks this is unlikely to happen until the second part of this year.

However, the advantage of investing through a pension means that the question of timing the market is less of an issue as I will be paying in small amounts each month rather than one lump sum.

On top of that, there’s a chance that some of the tendencies towards convergence between the economies of east and west could reverse over the next five to 10 years.

If the growth of the middle classes in China proceeds at generally expected then the consumer sectors in those countries are going to prosper and that is something that could well be less correlated to the FTSE.

If they grow to form a larger part of their indices than the diversification between Chinese and Western markets – or at the least between emerging market focused and UK funds – could well decline.

For these reasons I think it’s worth building up a small allocation to the region in my portfolio worth 5 per cent or so.

I want to go through a general emerging markets fund because I want to be able to benefit from a resurgence in Latin America if it comes. That market has been sold of particularly hard, so the hope is that it has the potential to bounce back particularly strongly.


I wouldn’t want to take that bet myself but I’m comfortable letting a professional manager make that decision.

In terms of fund choice, my pension leaves me few options, the best of which is JPM Emerging Markets.

This fund offers a decent mixture of sectors, with high weightings to IT financials as well as consumer discretionary.

It has a minimal weighting to Russia, which I think is wise. I wouldn’t want to give my money to a manager investing in such a volatile political situation – the end game is impossible to predict and could be really quite horrific.

Performance of fund vs sector and index over 5yrs

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Source: FE Analytics


Over the longer term the fund has outperformed the index, although in recent years its returns have been average.

It does concern me that its returns have been in line with the index over the past three years, but given the serious losses suffered by investors in some of the sector’s other funds it has actually held up reasonably well.

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