Courtesy of Doug Short.
Never let it be said that investors do not have unrealistic expectations. This is true in both bull and bear markets. In the former, they come to believe the sky is the limit; and, yes, this time things are truly different, negating the value of past lessons learned. In the latter instance, they believe the sky is falling and there is little that can be done to forestall calamity.
So, it is not surprising that after two back-to-back years of lackluster returns, investors have come to question whether emerging markets are worth the risk. Prior to the 2008 crash, high double-digit returns, eclipsing developed equity market returns by a wide margin, seemed to be the norm. The last two years ? 2010 and 2011 ? thus come as a shock. While minus 3.0 percent is by no means a crash, it is a sharp deceleration versus the returns investors have become accustomed to.
We believe the original arguments for investing in emerging market equities remain as valid today as they did fifteen years ago. There are four reasons why investors should consider allocating a portion of their portfolio to emerging market equities. Note, none has anything to do with asset allocation and risk control; all focus on expanding the opportunity set inherent in an investor?s portfolio.
The first reason is demographics. In general, many emerging market countries have a younger population – whether the country is India, Brazil, Turkey or the Philippines. A comparatively more youthful populace confers benefits in both consumption and production. Young people buy things; whether clothing, computers or furniture. They also, as a rule, are more conversant with the latest technology, allowing them to be more productive than those two or three generations ahead of them.
Then, there are the efficiency gains to growth. If you wish to increase global productivity, the largest payoff comes from investing in the least capital intensive regions. Capital deepening ? the proliferation of machinery and technology ? leads to diminishing returns. Emerging markets have a lower ratio of capital deployed to manpower. Small investments tend to yield higher returns.
An absence of legacy costs in most emerging market countries is another attraction. With little in the way of social security schemes in place, emerging market nations are not faced with the same policy dilemmas politicians face in Europe or the U.S. Government revenues are not consumed by transfer payments and so can be invested in infrastructure.
Finally, many emerging markets offer a resource play. Many have not been thoroughly surveyed for mineral or energy wealth.
For these four reasons, we believe many emerging markets still offer attractive growth possibilities. And, with higher growth often comes a higher return on investment. But, as with many investments, time and patience are essential ingredients.
Notes: The MSCI EAFE Index (with dividends reinvested net of withholding taxes) is a free-float adjusted market capitalization weighted index which is widely used to track the performance of equity markets in developed countries in Europe, Asia and the Far East, excluding the U.S. and Canada.
The MSCI North America Index (with dividends reinvested net of withholding taxes) is a free-float adjusted market capitalization weighted index which tracks the share price performance of U.S. and Canadian equities.
The MSCI Emerging Markets Index (with dividends reinvested net of withholding taxes) is a free-float adjusted market capitalization weighted index which is widely used to track the performance of equity markets in emerging market countries in Africa, Asia, Europe, Latin America and the Middle East.
You cannot invest in an index. Performance shown includes the re-investment of dividends, net of applicable withholding taxes, and excludes any management fees, expenses and sales charges associated with most investment products.
“CAGR” is an abbreviation for compound annualized growth rate.
(Sources: MSCI/BARRA; Lipper.)
About American Independence Financial Services, LLC
American Independence Financial Services, LLC (“AIFS”) is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.
Important Disclosures
(c) 2011, American Independence Financial Services (AIFS). All rights reserved. Redistribution and quotation permitted with attribution to the author and source.
The views expressed in this document are based on political, market, economic and other conditions subject to change at any time. Data are acquired from sources believed to be reliable. But no warranties are made to the accuracy, completeness or timeliness of the data and information presented. Opinions expressed are those of the author unless indicated to the contrary. Nothing in this document should be construed or taken as financial or investment advice. Please consult with your financial advisor to discuss how the subject of this research report may impact your unique, individual circumstances.
Certain indices, yields, exchange rates and other market and economic statistics may be quoted or mentioned in this report. You can not invest directly in an index; nor can you obtain many of the other yields or rates quoted. Please bear in mind such indices and other statistics do not include many of the expenses associated with investing in securities including (but not limited to) trading costs, custodial fees and management fees. All index results cited in this document reflect returns including the impact of re-invested dividend or interest payments expressed in US Dollar terms unless noted to the contrary.
Investors should understand and consider these and other risks they may face by investing in the Funds. These risks are discussed more fully in the Funds’ prospectus. Investors are encouraged to read the prospectus.
For more complete information on the American Independence Funds, you can obtain a prospectus containing complete information for the funds by calling 1-866-410-2006, or by visiting www.aifunds.com. Please read the prospectus carefully before investing. You should consider the fund’s investment objectives, risks, charges and expenses carefully before you invest or send money. Information about these and other important subjects is in the Funds’ prospectus.
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