Capital Group portfolio manager Luis Freitas de Oliveira spoke at a lunch hosted by the Association of Superannuation Funds of Australia in Sydney yesterday.
Mr de Oliveira said investors mistakenly believe investing part of a portfolio in an emerging market exchange-traded fund (ETF) will enable them to capitalise on increasing demand for healthcare, air travel, leisure, automobiles, luxury goods and internet shopping.
He said what a passive index fund buys, however, “tends to be quite different”.
“Have a look at the Brazilian index: half of it is a state-owned oil company, a large universal bank, an iron ore miner, another bank and a beer company,” Mr de Oliveira said.
“When you think about the transformation that’s happening in Brazil and how to invest in it, that list seems a bit too short doesn’t it?”
Mr de Oliveira said this is also the case with the index for Russia, which mainly covers oil and gas companies and large state-owned banks.
“In China you’re also stuck with a bunch of state-owned enterprises, mostly in old economy type of activities,” he said.
“The broad index is also very concentrated, you have almost a third of your money in financials [while] information technology and energy make up another 50 per cent.”
Mr de Oliveira said investors looking to gain greater exposure to simple things like consumer staples would be better off investing in stocks like Dutch-domiciled company Unilever, which makes 50 per cent of its sales in emerging markets.
Where a stock is domiciled, Mr de Oliveira, said therefore has “very little to do with where your profits come from” given this single stock provides a greater exposure to consumer markets in emerging economies, compared with an emerging market index.
