Finding the right balance between active and passive

Many wealth managers now suggest that well balanced equity portfolios should boost their emerging market exposure to 10-15 per cent, and that this should be reviewed on a regular basis, to reflect the region’s rapid growth. It is a market where there are clear arguments for both active and passive approaches. Where gaining exposure quickly is of the essence, the liquidity of exchange traded funds (ETFs) makes them an obvious choice, but the relative paucity of stock research also suggests that active managers should be able to outperform. Manooj Mistry, head of Deutsche Bank’s ETF arm, says the db x-trackers Emerging Market ETF has enjoyed a 20-25 per cent boost from new inflows since March. “What we’ve seen is private wealth managers allocating a certain percentage of their portfolios to passive investments and ETFs will attract a good deal of that if exposure is required quickly. They might subsequently switch out to active managers or direct stock picking. It can go either way.” Claire Simmonds, client portfolio manager for JPMorgan Asset Management, notes however that earnings growth will become a key driver and this argues for active management. She categorises active funds into three types of play – the higher beta plays which are leveraged to the global cycle, core plays that are diversified across countries and geared to domestic consumption, and for those who are cautious of the volatility inherent in emerging markets, Ucits III funds that manage some of the downside risk, such as their own Alpha Plus fund. Another popular approach for investors who prefer to take risk off the table is to buy companies that are heavily exposed to emerging market growth, such as Vodafone, BHP, Rio Tinto and BP. Barclays Wealth, for example, is building an Asian Fusion Portfolio of companies that derive 50 per cent of total sales from these economies. This produces a number of semi-conductor firms, and other tech firms, such as US stocks Qualcomm and Micron Technology, but Barclays Wealth strategist Dean Turner believes that this sector bias is welcome as technology should lead the way out of recession. Another example is miner Vedanta, where 83 per cent of turnover derives from Asia. Some wealth managers also suggest opting out of Russia’s geo-political risk by avoiding Moscow and investing directly in commodities.