Q. I am about to start contributing to a personal pension fund and have been through a process to assess both how much risk I need to take with my investment as well as how much risk I will be able to tolerate on an ongoing basis.
Whilst I am comfortable investing 70-80% of the equity component of the investment in developed world economies (UK, USA, etc), I am attracted by the idea of investing in the emerging economies of the world as this is where I believe the real future growth lies.
I have come across ‘Emerging Market’ funds as well as ‘Pacific Rim’ funds and am slightly confused about which to invest in.
A. For many years, some investment commentators have written very positively about investing overseas in the developing world. As you say, growing economies could potentially bring you greater returns that investing in Western economies.
The first thing to say is that investing in emerging economies will be riskier than, for example, investing in the UK. Many emerging economy investment funds are quite volatile so you’d have to be comfortable with the valuation of your investment fluctuating widely.
Assuming you are happy to proceed, you then need to decide whether to invest in an Emerging Markets fund or a Pacific Rim one (or both). The key is to look at which countries they invest in as this factor alone will tell you how ‘emerging market’ the fund actually is.
To illustrate this, I have analysed 2 funds. One is an Emerging Markets fund and the other is Pacific Rim.
For each fund, the underlying countries they invest in are:
Emerging Markets
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Brazil, 19.1%
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India, 17.8%
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China, 12%
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Taiwan, 11.7%
Pacific Rim
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Australia, 45.7%
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South Korea, 24.9%
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Hong Kong, 19.3%
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Singapore, 9.7%
So, as you can see there is quite a marked difference between the two. If you want an exposure to the emerging economies, then obviously the Emerging Markets fund will be the one to invest in.
As all funds vary in their construction, ask to see the fund factsheet of the one(s) you are considering to find out which countries the fund(s) invests in.
