Saturday, 13 February 2010

My allocation to emerging market equities

Tim Hale in his book ‘Smarter Investing : Simpler Decisions For Better Results’ provides some tips for investing in emerging markets. These are:

- do so in moderation;
- Own a diversified pool of markets, rather than putting all your eggs in one basket, such as China, despite what the Sunday papers may say;
- be prepared for the times when returns diverge substantially from UK and developed markets on the downside;
- don’t be overly optimistic about the degree to which a free lunch is on offer

Additionally he suggests that the correlation between emerging markets and developed markets is 0.6 although he also states that this could be generous. I have also considered that “from 1987 to 2004 emerging market equities only beat US equities by 1 percent ... but with around twice the level of volatility...”

With all this in mind plus knowing that I want to minimise fees and taxes I have positioned my retirement investing emerging markets equities as follows:

- Investing in moderation with a desired allocation of only 5%.

- The ETF owns a diversified pool of markets which I detail below.

- I am prepared for times when returns diverge substantially which should help me to buy low and sell high as I have described in previous posts.

- I am not being overly optimistic about the free lunch.

- I am buying the ETF’s within my ISA. I have done this as picking up on the high volatility point means that I may have to buy and sell often which is in my opinion best done in a tax wrapper to prevent capital gains tax ever becoming payable.

- I have minimised fees by buying an emerging markets exchange traded fund (ETF)

My Emerging Markets Equity ETF asset allocation is as follows:
- 16.9% China
- 15.7% Brazil
- 12.2% South Korea
- 11.0% Taiwan
- 8.7% India
- 6.9% South Africa
- 6.6% Russia
- 4.3% Mexico
- 2.7% Malaysia
- 14.9% Other

As always DYOR.


  1. What ETF are you using? I've just finished reading the chapter you have described and am considering how I will be investing in emerging markets. I have decided to adopt the "global tilted portfolio" that Tim describes.

  2. When I last looked I found what looked to me like three plausable options:
    - iShares, IEEM, Distributing fund, TER 0.75%, Dividends paid quarterly
    - dbXtrackers, XMEM, Distributing fund, TER 0.65%, Dividends reinvested
    - Lyxor, LEME, Distributing fund, TER 0.65%, Dividends annually

    I could see reasons for owning all of them depending on what stage of life you are at.

    There may be more options now and maybe some of the details may have changed since I looked last. I'd be interested in what you find once you do your research.

  3. At the age of 32 I don't see any reason to limit investments in emerging markets to 5%. Most of my ISA allowance is invested in high risk stuff such as junior gold mining funds, emerging markets, clean energy.

    It is important to buy the dips and not to buy when things are riding high. I prefer not to sell during spikes as I have a 20 - 30 year time scale on my investments.