This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio.
Savers have withdrawn £1.8 billion from pension schemes in just two months – and invested in income-paying funds. According to the Association of British Insurers, following the new freedoms introduced in April allowing full access to pension pots at retirement, 250,000 Britons have chosen to withdraw cash totalling almost £2 billion.
During the two months to the end of May £1.3 billion was invested in income paying funds, with the majority of investors choosing drawdown products over annuities. Savers have invested £630 million into 11,300 annuities, and £720 million into 10,300 drawdown products. In the March 2014 Budget Chancellor George Osborne announced plans to scrap compulsory annuity purchasing at retirement, promising to treat pension savers “like adults” – free to spend their savings as they wish.
The ABI’s Director for Long Terms Savings Policy, Dr Yvonne Braun said that the latest figures showed tens of thousands of people were successfully accessing the pension freedoms as intended, but warned that there were still some issues that needed to be worked through, in particular around financial advice.
“The data shows people with smaller pots tend to be cashing them out while those with larger pots tend to be buying a regular income product. It also highlights an increase in the number of people putting money into income drawdown products that can take advantage of the new freedoms,” she said.
Morningstar’s Chief Investment Officer Daniel Needham advocates a portfolio approach to managing your investment pot in retirement; putting a portion in a guaranteed annuity, some money in a drawdown product, an amount in a self-invested pension and the remainder in cash for liquidity.
Many Britons will be retired for as long as they were working – meaning that a post-retirement investment strategy must aim for growth as well as income. Emerging markets can play an important role in achieving this growth, but are only suitable for those with a long term investment horizon and must be blended with less volatile, income producing assets such as bonds and large-cap developed market equities. Diversification is always important – but particularly at this stage in your life, when you no longer can rely on employment income to make up losses. With that in mind, here are three Morningstar Analyst Gold-Rated emerging market equity funds which could play a positive part in a pension portfolio.
Skagen Kon-Tiki
We still have strong conviction in Skagen Kon-Tiki, says Morningstar fund analyst Thomas Furuseth. The process has remained the same since launch. The team look for cheap companies that are underfollowed or out of favour. Managers are given plenty of flexibility and are willing to use it, but the approach comes with clear risks. These risks were on display both in 2012, the first calendar year in which the fund underperformed its benchmark during Stensrud’s tenure, and in 2014.
In 2014 the crew had difficulties with their Russia picks. The biggest issue there was Sistema, where investors feared the company would lose their Bashneft stake. Even though the fund gained 1.7% in 2014, it was far behind the fund’s MSCI Emerging Market benchmark, which returned 10.4%. We will continue to monitor the changes at Skagen, but we are confident enough at this point to reinstate the Morningstar Analyst Rating of Gold.
Comgest Growth Emerging Markets
This fund takes a long-term approach and has performed well over the past 10 years managed by one of the best teams of investors in emerging markets in Europe. The fund suffered two years of heavy losses in 2008 and 2011, but retains its upward trajectory. Morningstar analysts believe in the high quality of the three managers working collegially with the other 16 experienced analysts based in Paris and Asia. It has a Gold Rating.
JP Morgan Emerging Markets (JMG)
This Gold Rated fund has been run by an experienced portfolio manager in Austin Forey since 1997. Forey brings well over two decades of industry expertise, the bulk of which are in emerging markets. He has been with JP Morgan his entire career, resulting in a strong working relationship with his colleagues. Forey’s process is tried and tested, and such out- and underperformance is typical of his style. He takes a long-term approach and focuses on businesses that benefit from domestic consumption growth, rather than commodity prices and currency moves; hence, the portfolio tends to be dominated by financials and consumer staples.
At the same time, cyclical sectors such as energy, industrials, and materials are generally underweight. As a result, the fund tends to lag in commodity-related rallies, while Forey's focus on quality growth stocks can also hold the fund back during momentum markets, such as 2009 and again in 2013.
