The Importance of a Long-Term Focus: Emerging Markets
This article is part of our Series “Portfolios in Motion: Recap of Recent Investment Updates”. We send out a more detailed version to our clients in order to keep them updated about why we've made certain investment changes, new research we've done, or market activity we are watching closely.
Many think of idyllic rice fields upon mentioning East-Asian economies. In reality, East-Asian populations have been moving out of rural poverty and into an urban middle class as their economies have grown over the past 4 decades. These emerging markets have evolved to become drivers of global growth with less investment risk than in the past.
An emerging market is defined as an economy within a developing nation that shares some, but not all, characteristics with fully developed ones. As these economies grow, they begin to play a more active role in the global market.
Emerging markets are a great choice for long-term investing since they are, by definition, developing over time. Because emerging economies are very different from developed ones, they offer an opportunity for diversification in portfolios.
For the past few years, we have primarily used a top-performing mutual fund for client portfolios. But with success comes growth. As a mutual fund grows in assets, it tends to experience what’s known as “style-drift.” Style-drift can occur when the fund manager has invested in every company he likes in his discipline, but still have more money to spend. In these instances, the manager is often pushed into investing in areas outside of his discipline.
We still really like the mutual fund, but we feel that emerging markets is an area that is poised to improve and would benefit from diversification in client portfolios. To that end, we began adding a second highly-rated mutual fund to many portfolios. This led to an increase in Emerging Markets positions overall in equity allocations.
In the recent past we have underweighted clients in emerging markets relative to the index. The strong dollar led us to underweight emerging markets, as their local currencies suffered. Recently two things have changed: (1) the financial stability of emerging markets matured, and (2) the strong dollar has run its course. We believe now is a good time to transition portfolios to a weighting more consistent with the global market.
As your financial advisor, we strive to add value to your portfolio with allocation decisions like this one. If you have any questions, please do not hesitate to contact us.
This article is for informational purposes only and does not constitute financial advice. You should consult with a financial advisor to determine what may be best for your individual needs. Past Performance is no guarantee of future results.