“Not having Asian investments in their portfolio could become a medium- to long-term impediment to savings growth for Australian investors,” Mr Bryant said. 

“Many investors are too complacent about this shortfall, misleading themselves that their portfolio structure and overall investment strategy make up for any lack of Asian investment. 

“They have simply accepted a number of myths about investing in Asia – such as if they are invested in Australian companies, or if they have an international component in their portfolio through US or European equities, then they have exposure to Asia as these are major trading partners of the region. 

“Acceptance of such myths betray a lack of understanding verging on complacency that, if not addressed, could prove costly to their portfolios.” 

Mr Bryant said that while it is generally accepted that this is the Asian century for trade and power, investors haven’t accepted the sense of investing in the region to participate in its inevitable growth. 

“It makes particular sense for Australians to invest in the region because of our growing relationship with Asian countries,” he said. 

“Australia’s four biggest export markets are China, Japan, South Korea and India which, when combined, account for over 53 percent of our exports. Yet only 8.5 percent of our total international investments go to the region [1]. 

“On the other hand, our traditional trading partners, the US and UK, the powerhouses of the nineteenth and twentieth centuries, now only take 9.5 percent of our exports, yet account for 51 percent of our investments [2]. 

“This indicates a blinkered approach that does not recognise time has moved on,” Mr Bryant said. 

He said that he had also heard anecdotal evidence from investors showing that they simply don’t understand the investment realities of Asia. 

“For example, investors seem to think that markets in Asia are less secure than in developed countries because of corruption and weak regulation. 

“In believing this they are overlooking the scandals in Wall Street, London and other western financial and economic centres – including Australia with Storm Financial, Trio and the Australian Wheat Board (AWB) among others. 

“While Asian governance varies enormously country by country, main investment centres such as Japan, Singapore, Hong Kong and Korea, are highly efficient and transparent. 

“Nor do we recognise and give credit to the strength of Asian economies – today Asian central banks collectively hold about half the world’s foreign exchange reserves [3]. 

“Virtually all forecasts and predictions suggest Asia will continue to grow dramatically and, by the middle of this century, experts believe it will account for over half of all global trade. 

“Such evidence means that it simply doesn’t make sense for Australians not to be investing in a region with such strong attributes and outlook,” Mr Bryant said.

[1]   Emerging markets to account for 80% of future global growth: ex-IMF chief, English.news.cn, June 2011

[2]   HSBC survey (Nov 2011)

[3]   ‘Why Invest in Asian Credit?’ PIMCO, May 2012 

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“The CFS Global Emerging Markets Select Fund was upgraded to five stars from four stars. The fund, which is contrarian, benchmark-unaware, and relatively unconstrained, has delivered impressive results since its inception. Its global emerging-markets investment team represents the strongest investment team in our rated peer group,” stated Simone Gavin, analyst at S&P Fund Services. 

“Despite S&P’s high regard for the Schroders’ emerging-markets team, the capability is being downgraded to four stars from five stars. This is due to process changes and other issues that have arisen since our last review in 2010, and we believe these could hinder future performance.” 

“The majority of funds reviewed received a three-star rating, with only the one fund achieving a rating of five stars. Team and process changes have constrained our conviction in some three-star rated funds,” added Ms Gavin. 

The Walter Scott Emerging Markets Fund and the Realindex Emerging Markets Fund are newly rated by S&P. Both funds received a three-star ‘NEW’ rating. The Invesco Asian Consumer Demand Fund (formerly the Invesco Asian Share Fund) changed from a broad sector-based product to a thematic consumer demand fund, and also received our three-star ‘NEW’ rating. 

The Hunter Hall Asian Value Trust was rated earlier and assigned three stars in September 2011. It was placed ‘On Hold’ in November 2011 following Jack Lowenstein’s departure from the team. The ‘On Hold’ rating is now resolved and the fund has received a two-star rating in this release. The rating reflects the limited Asian emerging-markets investment experience of the small team. 

Two ‘On Hold’ ratings are retained; these apply to the AMP Capital Asian Equity Fund and the ING Global Emerging Markets Share Fund. Due to likely changes to both funds, we are not currently in a position to resolve the ‘On Hold’ ratings.

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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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