The term 'emerging' market may seem something of a misnomer to many investors; developments in China and Brazil after all are front page news.
The term ‘emerging' market may seem something of a misnomer to many investors; developments in China and Brazil after all are front page news. With an average of seventeen analysts scrutinising each stock, little remains hidden at the emerging market large cap level. Certainly, the likes of Samsung, LG and Alibaba are becoming household names.
This partly explains why we chose to gain exposure to this asset class via the small cap sector. As Bryony Deuchars, Portfolio Manager - Emerging Market & Asia Pacific Equities, points out: "The sector is massively under-researched. Around one quarter of emerging market small-caps are not covered by analysts and many more are barely scrutinised."
An active approach
Our decision to implement this investment idea through our active fund was easy given the obvious limitations of ETFs within this space. Being under-researched and with mixed corporate governance standards, EM small cap is an inefficient market where ETFs have struggled to match the performance of active funds.
By buying an active fund, we aim to ensure that we only invest in high-quality companies with sustainable returns, bright prospects and a proven track record.
Small caps focus on rapid growth
We believe that small caps provide the best means of profiting from the emerging markets long-term growth story. These economies continue to play catch up with the developed world and look to be expanding at a much faster pace over the long term.
Fast-rising disposable incomes and a burgeoning middle class are driving demand for consumer goods and services such as healthcare and education, areas where small companies have a particularly heavy presence.
For example, companies that Bryony likes include Bumrungrad, a Thai hospital operator, which is benefitting from rapidly-growing demand for healthcare services not just in Thailand but from other parts of Southeast Asia.
Incomes are rising fast across the region so people can increasingly afford private healthcare, while public health provision is under strain. Bumrungrad offers world-class services that are attracting health tourists from around the world and is generating long-term, sustainable growth.
Moreover, Bryony argues that emerging market small caps continue to offer particularly good value: "In the developed world, small caps trade at a premium to their large-cap peers, while emerging markets small- caps trade at a discount to their large cap brethren."
Finally, Bryony believes that emerging market small caps are also less risky than is generally thought: "There is a perception that this is a volatile asset class. Yet the index is significantly less volatile than its large- cap counterpart and exhibits similar levels of volatility to that of developed markets."
The Aviva Investors Multi-asset Funds' investment in emerging small cap stocks provides just another example of the way in which we leverage the expertise of our colleagues across Aviva Investors to deliver the best possible outcomes for our clients.
The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates. Investors may not get back the original amount invested.
The funds use derivatives, these can be complex and highly volatile. This means in unusual market conditions the funds may suffer significant losses.
The funds invests in emerging markets, these markets may be volatile and carry higher risk than developed markets.
Find out more at avivainvestors.com/maf
For financial advisers only. This commentary is not an investment recommendation and should not be viewed as such. Except where stated as otherwise, the source of all information is Aviva Investors as at 31 July 2017. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.
The Aviva Investors Multi-asset Fund range comprises the Aviva Investors Multi-asset Fund I ("MAF I"), the Aviva Investors Multi-asset Fund II ("MAF II"), the Aviva Investors Multi-asset Fund III ("MAF III"), the Aviva Investors Multi-asset Fund IV ("MAF IV") and the Aviva Investors Multi-asset Fund V ("MAF V") (together the "Funds"). The Funds are sub-funds of the Aviva Investors Portfolio Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available to download in English from our document library on avivainvestors.com.
Issued by Aviva Investors UK Fund Services Limited, the Authorised Fund Manager. Registered in England No. 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: St Helen's, 1 Undershaft, London EC3P 3DQ. An Aviva company.