Emerging markets offer challenge, opportunity

Emerging markets offer a great growth opportunity but advisers need to be careful what products they invest in, according to an expert.

Tuesday, January 29th 2013, 3:00PM

by Niko Kloeten

Dominic Johnson, chief executive of London-based boutique Somerset Capital Management, has been brought to New Zealand by Tower Investments, which recently chose Somerset as its emerging markets manager for international equity portfolios, replacing Capital International.

Johnson said exposure to emerging markets was important for the growth component of portfolios but financial advisers needed to be wary of their volatility, which could spook investors and cause them to pull out if risks are not managed carefully.

“The biggest problem with emerging markets is that people buy high and sell at the bottom; themes often come to people’s attention when the cycle is at its conclusion.”

He said there had been five major crashes since he began investing in emerging markets in 1995, yet during this time even investing in the index would have returned 400%.

“Having no return is the least suitable concept in investing,” he said, referring to the requirement in New Zealand that financial advisers offer "suitable" advice to clients. “If you look at the UK people have been advised not to invest in anything that has a return.”

Johnson said another challenge for financial advisers was that emerging market indices could become “unbalanced” due to markets being less efficient.

“I’m glad I’m an active manager in emerging markets because it’s very easy to add value there; even average managers can beat the index,” he said.

Johnson said political risk was another factor that must be considered when investing in emerging markets.

“If you’re using a US index you don’t have to worry about the politics. If you’re investing in a country like Colombia there’s a reasonable chance you’ll wake up in the morning and find your company has been seized.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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