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The other day a friend asked me where to put some inherited money. My reply was to put it in a high-interest savings account and leave it there for now.
I admit, that was a little flippant but let’s be realistic: 2018 has not been a good year for stock investors, at least not so far. The markets are more volatile than we’ve seen in years, with big swings up and down that are directly tied to the latest headline news coming out of Washington, Beijing and Moscow. The net result has been more down than up.
The first quarter was doused with red ink almost right across the board as far as the major indexes are concerned. In New York, the Dow fell 2.5 per cent in the three months to the end of March while the S&P 500 slipped 1.2 per cent. Nasdaq managed a small gain of 2.3 per cent but gave back almost all of that in the first week of April as Facebook, Amazon and other big tech stocks came under heavy selling pressure. Here at home, the TSX lost 5.2 per cent in the first quarter.
I could bore you with more numbers, but suffice to say that we saw the same pattern in all the other major world markets. Germany, Britain, Japan, Hong Kong and others all ended the first quarter in negative territory.
But there was one pleasant surprise. While the heavyweights were falling, emerging markets have been doing quite well. Unfortunately, not many people have noticed – we’ve become overly obsessed with what happens on Bay Street and Wall Street. It’s time to take a look at some of the developing countries around the globe. There are profits to be found there.
The Wall Street Journal ran a feature story recently saying that most advisors recommend having between 5 and 10 per cent of your assets invested in emerging markets funds.
“Developing markets benefit from younger populations than their developed brethren, a rapidly growing middle class, and a shift away from manufacturing toward more consumer-based economies,” the paper said. “Emerging markets now account for 40 per cent of world GDP, and economists expect that percentage to rise rapidly.”
That brings us to the question of how to invest in these growing countries. I suggest using either mutual funds or ETFs for expert management and portfolio diversification. Here are three that are worth a look.
HSBC BRIC Equity Fund (Investor units)
This fund focuses on the four senior emerging markets: Brazil, Russia, India and China. About one-quarter of its assets are invested in each of those four countries. I’m rather dubious about having so much in Russia, which is feeling economic pressure from sanctions, but recent performance has been good. The fund gained 13.1 per cent in the three years to the end of March, compared to 8 per cent for the category as a whole. For the latest 12-month period, the gain was 17.9 per cent. But this fund can also be very volatile, so it needs to be watched carefully. It lost almost half its value in the year to Nov. 31, 2008, so if the market starts to turn against it don’t hang on. The management expense ratio (MER) is high at 3.17 per cent, but the recent performance justifies the cost. The minimum investment is $ 500.
Trimark Emerging Markets Fund (class A)
This one takes a more diversified approach. About one-third of the portfolio is in China, but the fund also has significant holdings in countries like South Korea, Taiwan, South Africa, Mexico, etc. Russia accounts for only 5 per cent of the total. The fund gained an average of 11.1 per cent annually for the three years to the end of March and was ahead 19.1 per cent in the latest 12 months. This fund was launched in 2011 so it did not experience the plunge of 2008. To date, it has been profitable in every calendar year since inception. The MER is 2.79 per cent and the minimum investment is $ 500.
iShares Emerging Markets Fundamental Index ETF
If you prefer an ETF, there are several from which to choose. Blackrock’s iShares series offers four emerging markets equity funds and one bond fund, and most other ETF providers have at least one product.
The fund I have selected has the best three-year record, with an average annual gain of 11.1 per cent. As of April 10, this ETF was showing a year-to-date gain of 4.5 per cent.
The portfolio tracks the FTSE RAFI Emerging Index, which selects stocks based on several fundamental factors including dividends, free cash flow, total sales, and book value. Almost one-third of the assets are in China. Other significant holdings are in Taiwan (15.7 per cent), Brazil (13.5), Russia (8.2), and India (7.3).
As with all emerging markets funds, this one can be volatile. It lost more than 23 per cent in 2011 and also finished in negative territory in 2013 and 2015. But over time, the returns have been very good – an average of 11.3 per cent annually since the fund was launched in April 2009. The MER is 0.72 per cent.
There are many more emerging markets products out there so take some time to research the field and talk to your financial advisor, if you have one, before making a decision.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.