A better emerging markets buy

Just a few years ago such companies were export orientated as new factories and cheap labour enabled them to grow by undercutting the enervated companies of the developed world. Increasingly, however, the best opportunities in emerging economies are in companies that focus on their domestic markets, where growth is propelled by a newly-affluent middle class, who want to grasp the indulgent lifestyle that will one day make them as flabby and complacent as their counterparts in the west.

And this gives me a problem in the Bearbull Global Fund because clearly its exposure to emerging-markets equities does not meet these criteria. Rather than getting exposure to the real potential for growth in the developing world, the fund's so-called emerging-markets investment provides exposure to a mix of global giants, quasi utilities and national champions.

I was sort of aware of this when I launched the global fund a year ago, putting 25 per cent of its resources into the iShares MSCI Emerging Markets exchange-traded fund (code: SEMA). That gave me a fund where the biggest holding is global electronics giant Samsung Electronics. The quasi utilities are the likes of Russia's Gazprom, the second biggest holding, and Mexico's America Movil, the major mobile telecoms operator in central and southern America. And the national champions – as well as Gazprom – are China Mobile, the world's biggest mobile telecoms operator by subscriber numbers (approximately 650m) plus a Brazilian trio of oil and gas explorer Petrobras, miner Vale and Banco Itau, which is spending a fortune to convince its public that this recently-merged entity is the global Latin American bank.

Some may be great companies. That's not the point. What matters is that they don't constitute a credible emerging-markets fund. For proof, line up the 10 biggest holdings of the iShares emerging markets fund against the 10 largest holdings of the iShares developed markets fund, iShares MSCI World (code: SWDA). Then we are comparing the likes of Samsung, Gazprom and China Mobile with, for example, Apple Microsoft and General Electric – all companies of similar scope and reach, and facing similar constraints. So the elite companies of the developing world have more in common with their counterparts in the developed world than with the smaller, vibrant, domestically-orientated companies wanted in an emerging markets fund.

This is no criticism of the iShares emerging markets fund. It is simply a passive index tracker so its holdings must be the components of the MSCI Emerging Markets index weighted by market capitalisation. But it's not what I want. However, there is a readily-available alternative, which gets closer to those newly-moneyed consumers.

Take the 10 biggest holdings of the iShares MSCI Emerging Markets SmallCap fund (code: IEMS) and we get something that brings investors in touch with the dynamic side of developing economies and their consumers: a DIY retailer in Thailand; a housebuilder in Brazil; an industrial estates developer also in Thailand; a fashion retailer in South Africa; a property developer in Indonesia. Put another way, 20 per cent of the SmallCap fund is exposed to discretionary consumer spending, 8 per cent to consumer staples and 6 per cent to healthcare. In contrast, the big-companies fund is all banks (24 per cent) and energy companies (15 per cent), with discretionary consumer spending comprising just 9 per cent of its holdings and healthcare only 1 per cent.

This is more like it, so I have taken the Bearbull Global Fund's holding in the emerging markets multi-nationals exchange-traded fund (ETF), which accounted for just over 23 per cent of its capital, and swapped it for the SmallCap EFT.

In addition, I have axed the fund's holding in the ETF that tracked Germany's DAX index of blue-chip companies. There is a case for keeping it because if - when? - the euro breaks up, then German assets may well get re-valued upwards in anticipation of the day when Germany gets its own supercurrency. Though that would be a logical solution, it seems too far fetched to happen, so I've rather given up on it. The DAX ETF accounted for almost 11 per cent of the portfolio’s assets and I have swapped it for the iShares MSCI Emerging Markets fund, thus raising the global fund's exposure to emerging markets equities of one sort or another.

Last, one signalled move I have not made is to trim the global fund's exposure to Brent oil (16 per cent of assets). High though that proportion is, I won't trim while tensions surrounding Iran and economic sanctions remain taut.

That's more like it

iShares MSCI Emerging Markets SmallCap ETF top 10 holdings