High-growth regions such as the Asia Pacific appeal to investors with a lengthy time horizon who are looking to escape a sluggish economy at home.
However, they should avoid using passive exchange traded funds [ETFs] to access these markets, according to Peter Elston (pictured), head of Asia Pacific strategy and asset allocation at Aberdeen.
ETFs are becoming increasingly popular with investors who think that active management can offer little edge in developed markets, but Elston says they are utterly inappropriate for the less well-researched emerging economies in Asia. "The ETF approach is absurd in emerging markets because with simple research you can avoid the losers, and if you can do that, you can produce returns in excess of the region as a whole," he said.
"At the end of the day, if GDP growth is higher you should be able to expect better growth from emerging markets than developed markets, but only if you operate a bottom-up approach rather than a benchmarked approach to these markets."
"Asia ex Japan performed worse than the US market last year, that’s telling you something about this issue."
Data from FE Analytics shows that the S&P 500 grew 17.04 per cent over the past year, while the FTSE Asia Pacific ex Japan index grew 15.71 per cent.
Performance of indices over 1yr
Source: FE Analytics
Elston explains that the performance of a benchmark index does not capture emerging market growth well enough to be used as a way to access it.
"In Asia, one has to be quite careful about looking from a broad market perspective. What I mean is in Asia and emerging markets you tend to find that the link between economic growth and stock market performance is not very strong," he said.
"There’s a lot of leakage between the top line and bottom line, so making sure you are investing in the right companies, where you are going to get a fair share of the top line growth, is crucial."
"We think that where investors go wrong is by failing to recognise that corporate governance is critical."
Eston thinks that the downgrade of the UK by Moody’s earlier in the week is both a positive and a negative for investing in emerging markets.
"Sterling weakening bolsters the case for investing in Asia," he said. "However, it’s a tricky one, though. In some respects if sterling weakens, there’s less of a case for investing overseas rather than in the UK."
Earlier this week FE Trustnet looked at some high-growth single markets where passive options have stood up relatively well to their active rivals.
However, our data shows that for the broader emerging market or Asia Pacific exposure which is usually what an ISA investor is looking for, active management has done far better than passive index tracking.
Over the past three years the MSCI AC Asia ex Japan index made 26.73 per cent, and the DB X-trackers MSCI AC Asia ex Japan Index UCITS ETF 27.14 per cent.
This puts it well within the bottom quartile of the IMA Asia Pacific ex Japan sector, and worse than 56 of the 75 funds in the sector. Nine funds in the sector have made more than 50 per cent in this time.
Top-10 funds in sector over 3yrs and best-performing tracker
| Name | 3yr returns (%) |
| Aberdeen Global - Asian Smaller Companies | 81.81 |
| Newton - Asian Income Gross | 76 |
| First State - Asia Pacific Sustainability |
60.15 |
| Schroder - Asian Income | 60.15 |
| Schroder - Asian Alpha Plus | 59.91 |
| L&G - Asian Income | 53.83 |
| Schroder - Institutional Pacific | 53.62 |
| First State - Asia Pacific | 53.01 |
| First State - Asia Pacific Leaders | 51.64 |
| AXA - Rosenberg Asia Pacific Ex Japan |
44.2 |
| DB X-Trackers - MSCI AC Asia Ex Japan Index UCITS ETF | 27.14 |
Source: FE Analytics
It is a similar story in the IMA Global Emerging Markets sector.
While the iShares MSCI Emerging Markets ETF has made 17.98 per cent over the past three years, this is less than 27 out of the 47 funds in the IMA Global Emerging Markets sector, and seven funds have made more than double these returns.