Fund managers are offering single country funds in developing markets such as China, Brazil, India and Indonesia, but do they offer great rewards and are they worth the risk?
There is a cliché in the investment world of not putting all your eggs in one basket and, usually, it makes good sense. For instance, investing all your money into a high-flying Korean or Chinese fund might produce stellar returns. But what if tensions between North and South Korea intensify or the US tightens sanctions on China?
This is not to say you shouldn’t invest in single country funds, just that they should be one element of a larger and geographically spread portfolio.
From a risk management perspective, you would want the Baring Korea or Jupiter India funds (both have strong five-year performance figures) to ideally be satellite rather than core holdings.
Martin Bamford, chartered financial planner at Informed Choice, explains that single country funds can play a useful role when constructing an investment portfolio where they allow precise allocation to a region or theme.
Fund managers’ expertise
Expert single-country Fund managers are often based in that country so they can really understand local companies. Unlike generalist emerging market fund managers, they are not trying to cover too many bases.
“Within the portfolios we create for our clients, we only have UK, US and Japan single country funds, before broadening out to use wider allocations across Europe, Asia Pacific and Emerging Markets.”
Bamford adds: “For larger portfolios, it can be useful to allocate to a wider number of single country funds, although this requires careful consideration and ongoing monitoring.”
Sometimes there is an advantage in opting for narrower rather than broader funds. Not that long ago, BRIC funds were in vogue. This gave investors exposure to what were seen as the ‘power house’ emerging economies of Brazil, Russia, India and China.
A combination of sanctions, political scandal, commodity price collapses and economic mismanagement have taken the shine off BRIC products since.
Not surprisingly there have been a few casualties. For instance, in 2015, Goldman Sachs folded its BRIC vehicle, moving the assets invested into a more diversified emerging market fund.
China and India
While a preference for exposure to China and India might still have held appeal, did investors really want their money tied up in Russia and Brazil?
The concept of BRIC funds was to ignore the minnows in the emerging world, such as Taiwan, Vietnam, Columbia, etc. and focus on the four nations ‘set to reshape the global economy’.
The reality was somewhat different. Even high-profile funds such as the Allianz BRIC Stars fund, which took a great deal of money after launch, had to broaden its remit. This allowed the fund managers to invest up to one third outside BRIC countries before becoming a more generalist emerging markets fund in 2016.
No half-way houses
You could argue that rather than lumping four, very different economies together, the best options for investors are much broader emerging market funds or specific, single country vehicles.
Sometimes investors may want a more tailored investment portfolio. As Bamford explains: “We have a handful of clients who have experience, expertise or a particular interest in certain countries, and single country funds can be useful in these cases.”
“Where investors have had business dealings in India, for example, the ability to allocate part of a portfolio to an India fund, rather than more broadly through an emerging markets fund, is appealing.”
Bamford, however, urges caution and recommends that investors do not allow their portfolios to become too complicated.
“There are 196 countries in the world today, not all of which have an established investment market or funds that focus solely on them. Trying to split up your portfolio between every country with a single country fund on offer would quickly result in a very messy set of holdings. There’s such a thing as too much diversification.”
Single country investing, as part of a diverse portfolio, is for the single-minded investor, who understand the local market, and – crucially – that single country’s risks.