Investing in equity markets in developing economies may not be for the faint-hearted, but the much-quoted warning that you need nerves of steel and deep pockets to go into these markets is not the whole truth either.
Exposure to emerging markets in places like the Far East and China, Latin America and eastern Europe can be integrated very carefully and in small doses in a person's wider pension or investment portfolio, say investment managers.
Mr Dara Fitzgerald is one such manager with Hibernian Investment Managers, one of the few Irish life assurance companies with a Latin American fund. Precrash, this fund had returned a 70 per cent gross return for the year, says Mr Fitzgerald, and he remains confident that despite the sharp fall this past fortnight, that its short-term pricing and longterm prospects look good.
"This fund is mainly made up of blue-chip stocks like utilities, the banks and construction firms in Brazil, Mexico, Argentina and, to a lesser degree, in Chile and Peru. We go after the top 30 or 40 stocks out of a pool of about 60 or 70 and we rank them according to their growth potential and security.
"We also aim for quality funds in the Far East and China, though it is difficult to invest directly in China and so you deal through Hong Kong companies with related investment in China. The difference between the two emerging regions, in our view, is that while the economic potential of China is vast, its stock markets as opposed to the Hang Seng are unsophisticated, and the degree of professionalism and regulation of companies is more uncertain than the markets and stocks we choose out of South America.
"Those markets are better regulated and many of the companies we include are quoted on exchanges in New York.
"The long-term prospects for South America and China would probably be relatively equal, but the risk is probably greater in China than in Latin or South America," says Mr Fitzgerald.
Mr Gerry McCoy is managing director of the independent, feebased fund managers, Asset Management Trust. It invests clients' funds in a wide range of international asset managers, including Fidelity, Gartmore, Templeton and Invesco. Between them these companies hold hundreds of billions of dollars under management and have invested billions directly into emerging markets.
"If you have lots of money to leave for five or 10 years, you will make lots of money from these emerging markets," he says, "but you need to be prepared to leave it alone and not lose your nerve. These direct investment funds are not for money that you need to live on or retire with." The paper rewards can be impressive: the top Invesco emerging markets funds recorded average five-year returns between September 1992 and September 1996 of 281 per cent, says Mr McCoy. The top producer, an eastern European development fund made a 664 per cent gain over the period (and lost a chunk of it with the recent crash).
"Regardless of how rich a client is, we would always recommend that he or she never put more than 10 per cent of their equity investment in emerging markets," he says. "These markets have their place, depending on the circumstances but you need to take a prudent approach."
The same advice applies if you go the pension fund route, says Mr Fitzgerald. The pension fund contributor whose age, income and risk profile is compatible with the risk and volatility of these funds should consider putting no more than 5-10 per cent of their funds in a good emerging market for a period of time say at least five to 10 years. "Then forget about it," he says. The volatility of markets generally, but these newer ones in particular, are not for the person who watches the unit prices every day and has trouble sleeping at night, he adds.
The ideal mixture for good growth potential these days says Mr McCoy, is an equity fund which has a 40 per cent exposure to continental European stocks, 10 per cent in Hong Kong, up to 10 per cent in Latin America, 10 per cent or slightly more in smaller US stocks and 30 per cent in deutschmarks because of our impending participation in EMU.
"In the New Year you can then consider dropping your DM exposure and perhaps increasing your Hong Kong stocks to take advantage of the inevitable rise in that market."
On the matter of timing any investment, both fund managers feel that the current wave of market volatility isn't over and investors should be very cautious about buying stocks right now.
