Capital Group investment manager Andy Budden explained that size isn’t always important in emerging markets and investing “away from mega-caps can give you a higher exposure to underlying emerging market themes”.
According to Capital Group, a breakdown of returns for the MSCI Emerging Markets Investible index supports this with returns over the 10 years to 31 December 2013 at 9.4 per cent for companies in the first quartile of the index by market capitalisation, 11.2 per cent for the second quartile, 14 per cent for the third and 12.7 per cent for the fourth.
Capital Group said this also demonstrates that “economic exposure is more important than country of domicile”.
“Investors often target companies based in emerging markets, thinking they give the best exposure to rising living standards in those economies,” said Capital Group.
“However, that is not always the case – investors need to drill down to the source of revenues for companies, not where they are domiciled, to gauge their true exposure to emerging market growth.”
Mr Budden said Capital Group believes “investing in emerging markets as a single asset class is the right approach”.
“Not only does it cushion volatility, it still exposes the investor to the extraordinary growth emerging markets experience”, he said.
According to Capital Group it is also important investors recognise the importance of dividends in emerging markets.
“Emerging market companies that pay a dividend are showing a commitment to the future of their business and their shareholders and are demonstrating discipline around capital allocation,” Capital Group explained.
“Dividend paying companies in emerging markets have generated better returns over the long term, which is important as dividends represent about 30 per cent of returns in emerging markets over time.”
