Developed or emerging markets: where should you invest your ISA?

Over the past decade, developed market equities, with cumulative returns of 254%*, have significantly outperformed the 171%* returns of emerging market equities.

However, a closer look at the data reveals that, over the last ten calendar years, the fortunes of developed and emerging market equities have actually been more finely balanced: they can each claim to have outperformed the other in five out of ten years**.

So which will come out top in 2019?

If the first few weeks of the year are anything to go by, developed markets are ever so slightly ahead, up 7%*** since the start of 2019, while emerging markets are up 5%***. But there is still more than three-quarters of the year to go and, as 2018 showed us, fortunes can change very quickly.

Here we take a look at three developed and three emerging market equity funds you may like to consider this ISA season.

Developed market options

1. Rathbone Global Sustainability

This newly launched global equity fund has recently been awarded an Elite Radar. It can invest in companies of any size around the globe, but has a bias towards developed market mid-caps. Manager David Harrison focuses on selecting stocks with strong cash generation, and will actively avoid businesses involved in unethical or unsustainable practices. Each holding will also have to have at least one positive environmental, social or governance attribute.

2. Lazard US Equity Concentrated

The US is the largest developed market. This fund became available to UK investors in 2016, but the strategy has been run successfully for many more years. It is very concentrated, investing in just 20 to 25 companies, ranging from the fairly small all the way through to the very large. It contains the best ideas from across Lazard’s US equity funds and the strategy has outperformed the US stock market over long time periods. While it currently has a third of assets invested in technology companies^, just one of the usual FAANG stocks appear in its top ten, making it very different to the index.

3. Threadneedle European Select

There are 15 developed economies in Europe, so plenty of businesses to choose from. The managers of this fund invest predominantly in the continent’s larger companies and have developed a distinctive investment process that focuses on industry structure and a company’s competitive position. They prefer businesses that can defend their margins and industries with barriers to entry. Unilever, Pernod Richard, Adidas and L’Oreal are just some of the well-known names that currently feature in the fund’s top ten holdings^.

Emerging Market options

1. Magna Emerging Markets Dividend

A hidden gem among other better known emerging markets funds, Magna Emerging Markets Dividend benefits from a strong team, an intuitive investment approach and the backing of a company focused on emerging markets. The managers try to identify well-managed companies with robust business models and, importantly, whose management respects the interests of shareholders. They do this through on-the-ground research, visiting companies, as well as their competitors, suppliers and customers. Ultimately, they want to invest in companies that will also pay higher than average dividends.

2. Aberdeen Latin America

For the first time in a long time, five out of six of the main Latin American economies have pro-business governments. Mexico is the odd one out, but there – despite Trump’s obsession with a wall – household spending remains robust, wages are increasing and consumer confidence is still high. When you combine these factors with cheap currencies and stock markets, it makes the region one of our preferred in emerging markets this year. This fund benefits from a labour-intensive, yet cautious approach, which lends itself particularly well to these volatile and less-researched equity markets.

3. Fidelity China Special Situations

While there are concerns around slowing growth in China and the country’s huge debts, the government seems to be acting sensibly at the moment – managing the slowdown rather than trying to overstimulate the economy again. The manager of this trust says that it is hard to derail the natural development of China’s middle class and that, even at a milder pace of economic activity, there remains room for expansion. China is also a diverse opportunity set where the growth rate is not homogenous. The breadth and depth of Fidelity’s research resources on the ground should, he believes, help identify winners that are overlooked by the broader market.

 

*Source: FE Analytics, total returns in sterling, 10 years to 11 March 2019
**Source: FE Analytics, total returns in sterling, calendar years.
***Source: FE Analytics, total returns in sterling, 1 January 2019 to 11 March 2019
^Source: fund fact sheet, 31 January 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.