Save, make, understand money


BLOG: Should you invest your ISA in developed or emerging markets?

Paloma Kubiak
Written By:
Paloma Kubiak

Investors have just under a month to use up their £20,000 ISA allowance. But should you allocate your money to developed or emerging market equities?

Over the past decade, developed market equities have returned 265%, trouncing the 59% returns of emerging market equities.

But a closer look at the data reveals that over the last ten calendar years, their fortunes have actually been more balanced. Developed markets have outperformed in six years, emerging markets in four.

So, which will come out top in 2020?

After a tumultuous few days, who knows? The coronavirus has thrown global stock markets into turmoil. The UK stock market suffered its worst one-week fall since the global financial crisis in 2008, wiping 13% (or £200bn) off its value.

The US stock market also experienced its fastest fall since the Great Depression one hundred years ago.

What investors can do

As we head towards the end of the current tax year, some investors will be wondering where to put their ISA allowance.

For those now hesitating, I’d urge you to think of it this way: if you were willing to invest at the start of the year, why would you not be now, when stock markets are some 5% or more cheaper?

Many people wait for January sales or Black Fridays to purchase goods for a bargain price. Investing at times like this can be a similar strategy.

Here, we take a look at three developed and three emerging market equity funds you may like to consider this ISA season.

Developed market options

Lazard US Equity Concentrated

The US is the largest developed market. This fund is very concentrated, investing in just 20 to 25 companies, ranging from the fairly small all the way through to the very large. It contains the best ideas from across Lazard’s US equity funds and the strategy has outperformed the US stock market over long time periods.

Marlborough European Multi Cap

There are 15 developed economies in Europe, so plenty of businesses to choose from. This fund can invest in European businesses of all sizes, but has a strong focus on smaller companies, targeting the continent’s minnows. These businesses are often overlooked and hence have the potential to outperform.

Montanaro UK Income

Closer to home, the UK stock market has fallen more than its developed market peers this year, making its shares much cheaper. Montanaro UK Income offers something very different from the standard UK equity income fund, given it focuses on small and medium-sized businesses. Each holding will also offer an attractive dividend yield or the potential for dividend growth.

Emerging Market options

ASI Latin America Equity

For the first time in a long while, most Latin American economies have pro-business governments. They also have very different companies and can react to events differently.

For example, the Brazilian market is down more than 14% this year while the Mexican market is still just in positive territory. This fund benefits from a labour-intensive, yet cautious approach, which lends itself particularly well to these volatile and less-researched equity markets.

Invesco China Equity

China has been at the epicentre of the coronavirus and parts of the country have basically shut down in order to try to contain the outbreak. As a result, manufacturing and services in China have been hit.

The hope is that, once the virus starts to wane, the economic bounce back will be fast. This fund can invest in companies of any size, but because the managers are very selective about state-owned companies and generally dislike the banks, the fund tends to be underweight larger companies and has a bias towards medium-sized ones.

Guinness Emerging Markets Income

If you want to take the guess work out of your emerging market investments, this fund is an option. The managers have an emphasis on quality companies and dividend growth, and the portfolio of 36 companies is equally-weighted, so no one company dominates returns. They also have a one in, one out approach, which means they have to have real conviction in their ideas.

Darius McDermott is managing director of FundCalibre