Introduction to Investment Trusts – Emerging Markets

An Introduction to Investment Trusts – Emerging markets comparison

The Investment trust landscape within emerging markets across the globe is a fascinating and diverse environment, offering long-term investors the opportunity to see significant returns. For example, reports from a range of Investment Trust managers indicate that over the past decade the average global emerging markets investment trust has returned 461pc (The Telegraph Online, 16/09/2011).

It is argued that this is because emerging markets are currently in a much better position than their Western counterparts due to their typically higher fiscal reserves and lower levels of debt, as well as strong macroeconomic trends.

Investing in emerging markets is therefore potentially advantageous through an investment trust. However it is important to remember that it is emerging market funds which are held only as part of a diverse investment portfolio that have seen the safest returns in recent times, primarily for investors who invest for the long-term.

Here we take an introductory look at the Investment Trust landscape within a selection of key emerging markets.

South America:

Countries within South America have arguably seen the greatest change of all emerging markets and Investment Trust activity has grown recently.

For example, the stock exchange integration between Colombia, Chile and Peru, which made it the second largest equity exchange in the region, has drastically altered the landscape within the region, especially as Mexico and other countries have also stated their desire to join.

The major cities throughout the region are also increasingly showing signs of becoming key international destinations for business and tourism due to large-scale improvement in local infrastructure, a trend with the potential to yield economic benefits for foreign investors. For example, Colombia’s real Gross Domestic Product (GDP) grew by about 6.0% year-on-year in 2011, while inflation ended 2011 at less than 4%, facilitating a generally optimistic economic outlook.

Certain areas within the region also display a forward-thinking mind-set towards energy production and consumption with a focus on efficiency which, combined with significant growth in production volumes, should create a healthy future investment environment.

South-east Asia

South East Asiahas experienced large scale economic change over the past decade. Providing the potential for real growth across many developing markets, this dynamic region has become an attractive modern investment arena.

Economies in Southeast Asia have been growing faster than in many developed countries such as North America and Japan as well as nations within Western Europe. They have also outperformed many of their emerging market counterparts which has been reflected in a steady increase in Investment Trust activity throughout the area.

This growth has been largely fuelled by the fact that Asian economies are rapidly increasing domestic consumption of a wide range of goods. Increased demand for core commodities from Asian industry has given a further boost and the growing demand is expected to continue the growth of industrial output, offering greater impetus for Investment Trust activity.

For example, the Indonesian stock market was one of the best performing markets in 2011 – the MSCI Indonesia Index was up 6% in US dollar terms in 2011 – and this is predicted to continue through 2012-2013.

This strong performance has been matched by Malaysia’s growth as a very attractive investment destination, particularly for consumer and commodity stocks. As a result of sound fiscal policy, stable macroeconomic fundamentals and continued demand of natural resources, the long-term outlook for the country appears both resilient and positive.

Thailand also appears to be healthy and the economic recovery in good condition. The key to this economic growth has been maintenance of the country’s substantial agricultural resources, exploitation of offshore gas reserves, as well as well-established and highly successful manufacturing and tourism industries.

As a whole, South East Asia, like South America, will also benefit from the continued increase in infrastructure quality within each nation and this development will feed into each country within the region. This should mean that investment into a well-managed and regionally experienced Trust will yield strong returns.

China

China is the world’s most populous country and remains one of the fastest-growing major economies.

Consumerism has experienced colossal growth in the modern era as per capita income has increased. This vast demand for consumer goods and services ensures that the earnings growth outlook for managed investment is extremely positive. China’s foreign reserves are also the largest in the world, making it less vulnerable to external financial downturns. Combined with the fact that inflationary pressures have continued to ease in China and the industrial sector is still recording strong growth, means that international investors remain attracted to China’s booming economy and continue to increase their activity.

Commodity stocks are the obvious attraction as the global demand for commodities is expected to continue its long-term growth and as such commodity prices will continue to rise due to continued demand and supply constraints associated with the area.

India

A weak rupee means that there is currently an inflation risk but this also makes India more competitive in the global landscape. Some companies have been negatively impacted while others, like exporters, benefit from higher foreign earnings.

If foreign investment in India increases then the strength of the rupee would rise and this appears to have been stimulated by a governmental decision to allow in excess of 50% ownership of foreign companies in the retail area.

However, general weakness in global equities and the fact that the Indian market is somewhat more expensive than other emerging markets, means that large investment flows into the country could be inhibited in the near to mid-term. This adds to the general volatility of the Indian marketplace and as investors around the globe are seeking to move their money into assets they perceive to be safe due to the global financial climate, predicting future Investment Trust activity in India is challenging.

Conclusion

Investment Trusts have long been a chosen investment method for highly-experienced financial professionals and in recent years emerging markets present a range of interesting and attractive options. Many major companies manage Trusts operating in one or more of the regions investigated and the majority have seen strong results since the financial downturn experienced by the more developed global markets. However, investors should be aware that emerging markets can be turbulent and the risks can be greaterthan in developed markets.

Please do remember, eligibility to invest will depend on your individual circumstances, and all tax rules may change in the future. The value of investments can go down as well as up and you may get back less than you invested.

Emerging Investment Potential Next to Bali

In the recent years holiday investments in Lombok has been continuously increasing. Those who want to keep the paradise to themselves have been forced to accept the change as enormous potential brought wave of investments to reveals hidden beauties.

As of potentials, Lombok has everything that made Bali one of the World’s most sought after holiday destinations attracting both massive investments and crowd of tourists. In fact, many believe that Lombok has them all in better way.

Winding white-sandy beaches which are rather rare in Bali, pristine turquoise water with untouched coral reef underneath, beautiful offshore coral islands off in almost every side of the mainland, soaring mountain with verdant tropical forests, rolling hillside with small traditional villages scattering around, there are many other reasons why investors started to turn around from over-crowded Bali to the natural beauty of Lombok.
Among the most sought after area is the south coast, a breathtaking beauty which has been exclusive property of small local villages for centuries.

Kuta, the main resort area in the south coast, is definitely different from Bali’s Kuta. Here Kuta is a small resort town with limited range of holiday facilities including accommodations. Whilst it has an international-chain hotel, in general available facilities here are dedicated to cater backpackers and addicted surfers. Located a bit away from the current airport, most visitors to Lombok do not even have Kuta in their agenda. But those who have made their way to visit were amazed by the undeveloped peaceful bays, stunning beaches, and breathtaking vistas.

But it may not last so much longer. The new Lombok International Airport located about 20 minutes away from Kuta set to be open next year will bring flood of visitor straight to its doorsteps. Behind the quietness of the bay, massive investments have been proposed to the government and international real estate agencies are busy taking care their clients.

Currently the only luxury holiday accommodation facility in the area, Novotel Lombok will soon have neighbors as real estate analysts says that despite of significantly increased price – 100% to 200% in the last two years – big developers and investors are buying large plots of land to build resort properties.

In addition to investors, many riches are also making their way to secure their own piece of paradise to build private holiday homes for their family. Soon Lombok villas in this area will join their Bali counterparts in private holiday accommodation market.

Emerging Market Investments: Diversifying Into the Future

When investors look to diversify their stock portfolios, they often look overseas. Unfortunately, the choices they make are often limited to developed markets, thereby bypassing one of the most interesting and potentially profitable opportunities in global investing. There are compelling reasons to believe the most spectacular growth of the next few decades will come from emerging markets and the companies that are in the middle of this growth curve seem poised to deliver spectacular returns for the informed investor.

Here’s the bad news for many developed economies

Not to be too simplistic, but most developed world markets are laboring under the twin burdens of slow to no population growth and burgeoning numbers of elderly citizens whose need for social services threatens to compromise or even collapse their economies. Think…retiring “Baby Boomers” here in the U.S. and abroad and you’ll quickly see what we have observed.

Now, here’s the good news about emerging markets

In emerging markets, by contrast, large and growing populations of healthy young people are driving the market for consumer and industrial goods, increasing the demand for energy and infrastructure, and consuming vast quantities of raw materials. The companies that are delivering what this growing population wants and needs stand to out-perform their established brethren by a multitude of Xs. And it stands to reason that the stocks of these high growth opportunities will out-perform as well. Read that as potentially out-performing by many, many times the investment potential.

The downside…there’s usually a downside to most every opportunity, and here’s this one

Emerging markets stocks are nothing if not volatile.

Let’s emphasize that point…they can be very volatile.

It’s not unusual for emerging markets stocks and funds to be up 60% one year and down 40% the next. Some individual market issues can be even more volatile; up 200% to 500% and then losing close to 80% or 90% in the following months. Therefore, if the potential for such a roller coaster ride makes you break out in hives you might want to consider something a little more conservative; albeit, definitely less rewarding.If, on the other hand, you have a relative amount of resolve, some patience and a source for good information,, the rewards of well-chosen emerging markets stocks and/or funds could easily outpace many other investment choices…no guarantees, but the opportunity is certainly there.

Let’s talk strategy

You definitely don’t want the majority of your portfolio subjected to such extreme volatility, so determine in advance the proper percentage or investment limit. This is also not the place for funds you will need in the near to mid-term future (for conversation’s sake, let’s say that’s 24 to 48 months).And, if you catch the market as it’s turning south, it may take some time to ride out the bumps before you enjoy the returns you are expecting. You can buy a little safety by dollar cost averaging into an emerging markets fund, which simply means buying the same dollar amount at regular intervals over a period of months or years. This method ensures you’ll buy fewer shares when prices are high and more when they’re low. It can also mitigate the risk of putting all your money in at what could turn out to be

A near-term high.This same dollar cost averaging approach works for individual stocks too…which brings us to this question:

Individual stocks or mutual funds?

While some emerging markets stocks are traded on senior exchanges, many are not. You may find it more convenient or easier to diversify a portfolio, therefore, by purchasing an emerging markets fund. There are emerging markets index funds, offered by companies like Vanguard, as well as actively managed funds offered by American Century Funds and others.
While actively managed mutual funds often fail to justify their higher fees, the case of emerging markets may be an exception. Because there are more anomalies in the prices of emerging markets stocks, a good manager might, and we say might, be worth the extra cost.

If you choose active management, look for a manager with a long track record of outperforming the emerging markets indexes in good times and bad. If you have a strong conviction about a particular part of the world, you can also find funds that limit their investments to specific countries or areas.

For the most part, we have a bias toward individual stocks. In our experience, it’s been more fun and rewarding to analyze individual companies, figure out what sectors to focus on and then dig out the potential winners…those stocks that seem poised to deliver the types of returns we’re looking for…3x, 5x, even 10x gains.

When to sell

The simple answers might be:

When you reach your return target, or
When the market takes you out…like on a Stop Loss that was protecting your downside.
A more detailed reason to sell might be:
When you can lock in an appropriate amount of gains (only you know what’s appropriate for your objectives) by selling part of your position…and then hanging on to the balance and playing with the “House’s Money” because you believe there is still substantial upside.

With individual stocks, the fundamental performance and financial condition of the company can be the primary determining factor…additional triggers can be news about accounting problems, supply chain interruptions, board turn-over, a CEO, CFO or auditor resigning for unclear reasons.

With funds, it may be worth waiting for an up-cycle to sell. They can swing wildly from one year to the next. So, before you hit the sell button and lock in a loss, consider hanging in there until the fund has moved back into positive territory. Usually, this coincides with the global economy as a whole being on an upswing.

CONCLUSION

Emerging markets stocks generally have a place in the portfolios of all but the most conservative investors, or those with relatively short time horizons. High growth, emerging economies will likely provide the catalyst for outsize rewards to investors with medium to longer-term investing objectives.

We believe that from late 2011 through 2012 emerging markets will not grow as fast as they have over the past five years; but Asia has the best opportunity of returning to double-digit growth and outpacing the rest of the world.Additionally, we think growth is in the smaller emerging economies called ‘frontier markets;’ the non- BRICs (not Brazil, Russia, India and China) which now represent 20 percent of the world GDP; that means they are bigger than the U.S. economy. Everest Capital said, “That’s where the growth is.”

Qatar and Bangladesh are two examples of frontier markets.Taiwan, South Korea, South Africa, Mexico, Israel and 20 to 30 others are among the largest and more recognized countries that fall into the classic “developed” emerging markets category.Scott Kalb, CIO of Korea Investment Corporation, is a sovereign wealth fund manager invested in emerging markets. He said, “The most important thing about emerging markets is their current account surpluses. In general, we need to have a strong presence in those markets because it is important to have diversification.

“Twenty years from now, I think that emerging markets will represent 70 percent of GDP; now it is 15 percent.” As we mentioned earlier and as Travis Flenniken, CFA, and vice president of investments with DeMoss Capital, said in the closing comments of a posting on timesfreepress.com, “The volatile nature of stocks in the emerging market category may make it difficult for many to stomach [as] an investment; however, the prospects for growth are hard to ignore.”The editorial staff at MicroCap MarketPlace specializes in issued relating to microcap investing as well as small cap investing.