How to invest in emerging markets

Many investors recognize the likelihood that developing countries will grow at a faster rate than will developed countries over coming years. That’s simply because they’re so under-developed now. But some of them will suffer setbacks along the way. Here’s an equity mutual fund to take some of the risk out of investing in emerging markets.

Emerging_Markets RBC Emerging Markets Equity Fund (Fund code: RBF499(NL)) invests in companies located or active in emerging markets.

The fund reduces risk through several types of diversification. For example, it’s diversified by geography. Its geographic breakdown includes: South Africa, 13.5 per cent; China, 13.4 per cent; India, 13.0 per cent; Taiwan, 11.8 per cent; and South Korea, 7.3 per cent.

The fund is also diversified by individual equities. Top holdings are Naspers Ltd. (South Africa: internet), 5.7 per cent; Tata Consultancy Services (India: information technology), 4.9 per cent; Housing Development Finance Corp. (India: financial conglomerate), 4.7 per cent; Taiwan Semiconductor Manufacturing (Taiwan: semiconductor devices), 4.7 per cent; AIA Group (Hong Kong: life insurance), 4.2 per cent; Unilever PLC (UK/Netherlands: consumer goods), 3.4 per cent; Antofagasta PLC (Chile: conglomerate), 3.0 per cent; SM Investments (Philippines: real estate), 2.7 per cent; Shinhan Financial (South Korea: banking), 2.6 per cent; and Credicorp Ltd. (Peru: financial), 2.5 per cent.

Altogether, the portfolio consists of 56 stocks and one other holding. This is more than adequate stock diversification.

Finally, the fund is generally well diversified by industry sector, though its financial weighting is a bit high. Its industry breakdown is as follows: financials, 29.4 per cent; technology, 18.7 per cent; consumer staples, 17.1 per cent; consumer discretionary, 13.8 per cent; and materials, 6.2 per cent.

Fund is less volatile than its peers

The fund’s diversification, then, helps reduce geographical, individual sector and industry sector risk. Another form of risk is volatility. And on this count, the fund is less volatile than many of its peers. Its standard deviation (see below) over the past three years is 11.2, compared with 12.4 for the average emerging markets equity fund.

RBC Emerging Markets Equity Fund was started in December 2009. Since then, its compound annual growth rate is 7.1 per cent.

The fund has performed well compared with its peers over the past five years. Its 9.1-per-cent annualized return over this time ranks in the top quartile of the emerging markets equity category.

The fund has a management expense ratio (MER) of 2.37 per cent. That’s below the 2.41-per-cent MER of the median fund in the category. Relative performance has flagged a bit in more recent years, but we have confidence in the fund’s manager, Philippe Langham.

Emerging markets have underperformed world markets so far this year. In large part, this is due to US-China trade tensions, which may cause further volatility in these typically volatile regions. But patient, long-term investors may wish to buy now that emerging markets equities are a little lower than when they began the year.

RBC Emerging Markets Equity Fund is a buy if you want above-average growth potential and are willing to accept a higher level of risk to get it.

Defining standard deviation

In our discussion of RBC Emerging Markets Equity Fund above, we’ve referred to its standard deviation measure. But what is standard deviation?

According to the Canadian Securities Institute’s Investment Funds in Canada textbook, standard deviation is “a common measure of volatility in investment returns. It shows how spread out the returns are with respect to the average (mean) return. The higher the standard deviation, the more risky the investment.”

Generally, it works like this: Two funds, ABC and DEF, both have average five-year returns of 12 per cent. But ABC’s probable range of returns are as low as two per cent and as high as 22 per cent. Its standard deviation, therefore, is 10 per cent (22 – 12 = 10 and 12 – 2 = 10).

Fund DEF, on the other hand, has has a probable range of returns as low as eight per cent and as high as 16 per cent. It standard deviation, then, is four per cent (16 – 12 = 4 and 12 – 8 = 4).

Though both funds have the exact same returns, fund DEF is considered the less risky of the two. That’s because it has a narrower range of returns, or, in other words, it’s less volatile.

This is an edited version of an article that was originally published for subscribers in the June 1, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.