A Way to Play Emerging Markets

Like many investors I am drawn the idea of investing in emerging market because they offer additional portfolio diversification and these economies have stronger growth outlooks than developed ones. Offsetting these benefits are greater sovereign risk and cultural and political differences which can weaken capitalism in these countries. I think the positives outweigh the negatives as over time the aforementioned problems will be ironed out.

One way for a retail small fry like myself to get exposure to emerging markets is through an ETF such as the Vanguard FTSE Emerging Markets Shares ETF (ASX:VGE) (2.81% yield, 0.48% fee) in Australia or FTSE Emerging Markets UCITS ETF (LON:VFEM) (2.63% yield, 0.25% fee) in the UK. I have held both in the past.

Fund managers are leveraged to market prices because usually most of their revenue is based on a percentage on funds under management (FUM) and their costs are relatively fixed. This effect is magnified by investors adding and withdrawing funds during periods of strong and weak market performance respectively. Beating the market gets harder as FUM grows and so small funds have an advantage over large ones and the growing popularity of low cost ETFs is putting downward pressure on fees industrywide. Fund managers are capital light businesses and so often pay the majority of their profits as dividends. If you can pick a manager with the ability to beat the market after fees then I reckon the returns from holding such a stock should comfortably exceed those from holding an index fund over the long-term.

I hold Platinum Asset Management Ltd (ASX:PTM) and City of London Investment Group PLC (LON:CLIG). Both are fund managers who invest a meaningful percentage of total FUM in emerging markets, have winning long-term records and trade on high dividend yields (City of London 6.7%, Platinum 6.1%). They were originally purchased as part of my rules driven collection of stocks, but I continue to hold them because they offer a high income way to play emerging markets. I do not intend to sell unless I need to make space for better opportunities.