Steve Sweeney, Senior Investment Analyst responsible for this sector commented, “This growth reflects a combination of continued product development for retail investors in this category and a desire to increase product choice in a growth sector for advisers.”

Only two funds were awarded Lonsec’s Highly Recommended rating – the Aberdeen Emerging Opportunities Fund and the T Rowe Price Asia Ex-Japan Equity Fund.

It’s not just advisers and their clients showing greater interest in global emerging markets.

“In recent reviews of traditional developed global equities large cap managers, we have seen an increased exposure to developing economies,” explained Sweeney.

“We have also noted a modest increase in the number of funds using the MSCI All Country World Index over the MSCI World Index as the fund’s benchmark.”

“This trend is natural as global managers look to gain exposure to growing companies in markets with forward momentum.”

Lonsec believes that specialist emerging market managers with dedicated resources and tailored investment approaches may deliver superior outcomes in emerging markets versus those global equity managers primarily centred on traditional developed markets.

“Lonsec’s higher rated managers will tend to be singularly focused on this asset class, with dedicated resources on the ground and frequent company visitation programs as opposed to a bolt on approach to another strategy,” said Sweeney.

Despite the growing global awareness of emerging markets as a source of potential return, this sector remains a more inefficient research pool than developed markets particularly for those managers comfortable investing in the less heavily researched mid cap stocks.

“This gives fundamental, active managers with well formulated investment research processes a greater opportunity to exploit insights gained from direct company contact and the research effort in general,” said Sweeney.

While Lonsec believes there are a number of credible investment options to obtain passive market beta, such as the MSCI Emerging Markets ETF or Vanguard Emerging Markets Shares Index Fund should a passive approach be desired, Lonsec prefers an active investment approach when allocating to emerging markets.

“Emerging market investors paying active fees should be more willing to afford active managers greater freedom in portfolio construction to add insight and ultimately, alpha,” commented Sweeney.

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