The countries and types of companies that indexers put in their emerging and frontier market baskets vary widely, so financial advisors should do their homework to provide clients with accurate information.
“Read the labels,” says Norman M. Boone, co-founder and president of San Francisco-based Mosaic Financial Partners.
MSCI, for instance, has considered adding but ultimately still excluded South Korea and Taiwan from its developed countries equity index. Those countries are instead in the emerging markets index. MSCI analysts have said that the roadblocks are the countries’ currencies because they are easily converted and the stock market’s technical issues.
How does a country get put into the emerging markets basket, where MSCI has also placed Brazil, Egypt, and Turkey? It depends on who you ask.
Calvert Investments of Bethesda, Md., uses for its funds both countries that MSCI selects and “countries determined by the World Bank to have a low-to-middle-income economy and other countries or markets with similar emerging markets characteristics,” according to its website.
“A company is considered to be located in an emerging market if it has a class of securities whose principal securities market is in an emerging country; is organized under the laws of, or has a principal office in, an emerging country; derives 50% or more of its total revenue or earnings from goods produced, sales made, or services provided in one or more emerging countries; or maintains 50% or more of its assets in one or more emerging countries,” according to the Calvert website.
Boone says that his clients, many of whom want a percentage of their portfolio to go to impact or socially conscious investing, view international markets as “a real opportunity,” so sorting out the countries that are in the indexes is a priority.
MIX & MATCH
Investors who rely on more than one indexer should determine which specific nations fall into the indexers’ developed, emerging or frontier categories, says Timothy Atwill, managing director of investment strategy at Parametric, a Seattle asset management firm.
“If you mix and match indexers,” and you don’t identify what countries they include in each category, “you could wind up with no exposure in a country where you want exposure,” he says.
Moreover, “you could have the reverse happen and double down on country that you don’t want that much of,” Atwill adds.
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.
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