Zafran: Betting on the Population Boom
To be sure, you could focus on investing in companies based in the emerging markets that sell goods and services exclusively to its inhabitants. However, lesser oversight of corporate management and directors for some of these companies relative to the oversight in developed world countries, coupled with less stringent rules relating to corporate accounting disclosures, may leave you uncomfortable investing in stocks of these corporations.
Meanwhile, there are many global franchise companies, based in the U.S. or Europe, that sell a significant portion of their goods and services into the emerging markets. The challenge with investing in these global titans, however, is that many local-based companies may better understand the political and economic environment than their multinational corporate competitors. Moreover, such large global corporations are not really “pure plays” on the emerging market consumer, so you must account for the strength of their developed world market businesses as well when making an investment decision.
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Investors can turn to actively-managed funds, such as the Aberdeen Emerging Markets Fund and the Virtus Emerging Markets Opportunities Fund that invest in companies with strong corporate and financial quality poised to take advantage of the opportunity in emerging markets. Conversely, a thoughtful compromise between the tensions described above is achieved by simply gaining exposure to the dynamic growth of the emerging markets in a low-cost and well-diversified fashion. This can be done by buying the Vanguard MSCI Emerging Markets ETF or the iShares Emerging Markets Index Fund. In doing so, you will own companies selling products directly to the emerging market consumer such as China Mobile, America Movil, and Gazprom.
For those seeking the transparency of developed market financial information and yet still aiming to attain ample exposure to the emerging market consumer, investing in companies such as Yum! Brands, Unilever, Nestle, Colgate-Palmolive and Domino’s Pizza may make sense.
The world is undergoing tremendous social, political and economic shifts. There’s no denying that emerging market countries, and their consumers, are becoming a bigger and bigger part of the investment landscape. Be sure that your equity portfolio fairly reflects this changing tide.
Note: Luminous Capital may select different independent managers for advisory clients, and client asset allocations and investment strategies may differ based on a variety factors. This presentation is not a substitution for personalized investment advice, and should not be construed as a recommendation to purchase or sell a particular security or use a particular manager. Alan Zafran and his family have positions in the Virtus Emerging Markets Opportunities Fund (HIEMX) and Vanguard MSCI Emerging Markets ETF (VWO).
Alan Zafran is a Partner of Luminous Capital and has served as a financial adviser to wealthy families and institutional investors for the past 20 years. He began his career at Goldman Sachs in 1990 in the Private Client Group. After seven years at Goldman Sachs, Alan and his entire team joined Merrill Lynch in 1997. At Merrill Lynch, Alan helped to build the Private Banking and Investment Group. In May 2008, Alan and his partners launched Luminous Capital. Zafran holds a B.A.S., Political Science and Economics, from Stanford University, Phi Beta Kappa and an MBA from Harvard Business School, 1990.
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