Page 38 - DIY Investor Magazine | Issue 37

PIECE BY PIECE Apr 2023 38 DIY Investor Magazine · Diversification is beneficial, but that doesn’t mean a country- specific allocation should always be avoided...by Alice Rigby Diversification may be the only free lunch in investing, but the routes to it that many of us take to it can be self-defeating. Many investors allocate to a global equity fund or trust, believing it will give them exposure to a breadth of businesses across the world’s indices. While this can go some way, opportunities may be left on the table. Of the five largest funds in the AIC’s Global sector, four have over 50% of their assets in the US and the majority of the balance allocated to developed markets; as these economies plunge into a period of stagnant growth, investors in these broader trusts could be missing out. Over the past decade, the case for emerging markets has been driven by the fact that they are decreasingly reliant on international trade, their domestic markets flourishing as the middle class grows. The professionalization of their markets continues apace, with increasing market and financial regulation reducing risk for external investors. However, the volatility of the macroeconomic context for many emerging economies means dispersion between their performance remains. World economies are emerging from the pandemic at varying paces, and with varying degrees of success, meaning this dispersion may persist, so allocating to a selection of single-country funds could be interesting for some investors. In terms of economic development, Vietnam is relatively early stage when compared to its Asian peers, with domestic demand on the rise. Its population is comparatively highly educated, and government is investing heavily in infrastructure to encourage foreign direct investment – Samsung and Apple are among global giants with firmly established manufacturing operations there. It is in this context that Vietnam Enterprise Investments (VEIL) operates. Its management team has extensive local market experience; Dragon Capital has operated there since 1994, and utilizes the trust’s closed-ended structure to invest pre-IPO. It is currently on a wide discount, thereby offering some downside protection. India is another major destination for those seeking exposure to emerging markets, and while it is possible to gain exposure to Indian equities through a generic emerging markets fund, the undiluted exposure to this exciting market available via funds like Ashoka India Equity (AIE) makes a strong case for investing through a specialist. The trust has been top performer in its peer group (AIC India) since launch in July 2018, due in part to a proprietary valuation model (OpcoFinco), which considers recurring cash flows after capital expenditures and financing costs have been accounted for – in a bid to avoid value traps, which have apparently low P/E ratios but actually poor economic characteristics and cash flows as well. Both managers presented at our ISA online event. Disclosure – This is a non-independent marketing communication. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.