SMSF investors are beginning to understand the importance of emerging market exposure, with economic growth in the sector expected to be faster than in developed markets in the future.
“One of the most important things that SMSF investors can do as they approach retirement is to build a portfolio that can generate enough income for the rest of their lives,” the Capital Group senior vice president and head of Australia Paul Hennessy told selfmanagedsuper.
“Given the post global financial crisis environment and the growth trajectory of emerging markets over the long term, where they are projected to outgrow developed markets by 10 per cent over the long term, SMSF investors are starting to realise that an exposure to emerging markets is important to enable their investment portfolios to generate the income they will need in retirement.”
The Capital Group vice-president Andy Budden said emerging market investment opportunities were too big to ignore.
“This is actually reflective of the fact that they are going through quite a dramatic change at the moment, so they’re simply going to be different in the future to how they’ve been in the past and, in many ways, investor perception of emerging markets, consequently, is becoming outdated as well,” Budden said.
“Right now people look at emerging markets and see the flight of capital, currencies collapsing and the volatility, but these are often the best moments to get invested.”
Nevertheless, emerging markets of the future would need to be understood differently, as good long-term economic growth in the sector was no guarantee of good investment returns, he said.
“Looking ahead, while there will be some parts of the emerging market universe that do still enjoy euphoric growth, there are going to be other parts of emerging markets where any strong future growth will actually be dependent on reform,” he said.
“For the foreseeable future, we should also expect that emerging market investments will be more volatile than developed market investments and that has been one of the biggest obstacles for investors all around the world, but certainly in Australia.”
It was therefore crucial to invest in emerging markets in similar ways to investing in developed markets, particularly in regards to dividends, he said.
“However you invest in emerging markets, it’s very important to be nimble and selective and something else that’s changing with emerging markets is the style or the approach that you use for investing,” he said.
“In the past, investing in emerging markets has largely been about growth, but it is absolutely fascinating to see that dividends have become a very important part of investing successfully in emerging markets.
“The difference between the stocks that do pay a dividend and the stocks that don’t pay a dividend is absolutely enormous, in particular if you can find those companies that pay a dividend, but they’ve got a really sustainable business to sustain their dividend from year to year, those companies are undoubtedly the best performers.”
