A new home for China and India funds

David Prosser discusses recent AIC sector changes.

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David Prosser discusses recent AIC sector changes.

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It looks as if China- and India-focused investment companies may have outgrown their home. Next month, the AIC has just announced, will see the launch of several new investment company sectors, including China/Greater China and India, into which funds holding more than 80% of their assets in each of the respective country’s equity markets, will move.

This is more than just a housekeeping exercise. The AIC’s decision reflects growing recognition of these countries’ huge influence on the global economy and – potentially even more significantly – their rapid rise up the agenda for many investors. In one recent survey of institutional investors and financial intermediaries, two-thirds said they would increase their exposure to emerging markets over the next five years. And very often these days, emerging markets is shorthand for heavy exposure to China and India.

To see why, think about the MSCI Emerging Markets Index. China now accounts for some 40% of that index, while India accounts for a further 8%, following a small increase resulting from the Indian government’s move to allow foreign investors more freedom to buy Indian equities. In other words, if you buy an emerging markets fund, getting on for half your money is probably going into the Chinese and Indian stock markets.

In this context, many investors are looking for specialist exposure to these markets, rather than the more generalist approach. Several investment companies offer exactly that; it makes sense to group these companies accordingly. Listing Aberdeen New India, say, in a sector alongside VietNam Holding, as is currently the arrangement, will make less and less sense. Baillie Gifford China Growth no longer sits comfortably alongside Weiss Korea Opportunity.

To begin with, these new sectors will each consist of only a handful of funds. But over time, there is good reason to expect more launches of India and China specialists, because the rapid growth of these countries’ economies will inevitably see the capitalisation of their stock markets grow and grow. Many Indian and Chinese companies are already household names around the world – think of Reliance Industries or Tata in India, for example, or of China’s Huawei and Alibaba – but the list will expand very quickly.

Asset managers are excited by the rapid growth in the middle-class populations of developing economies – and the purchasing power they bring – and it is China and India that are driving this. By 2030, the global middle class is expected to reach 5.3 billion – 2 billion more than today – with 66% of that population accounted for by these two countries alone.

Moreover, unlike developed markets, where passive investment styles are now to the fore, the complexities of Indian and Chinese equities demand active managers with specialist expertise. The challenge is not only to grasp the opportunities in fast-growing sectors such as technology, healthcare and consumer goods, but also to avoid the pitfalls that these markets carry for the unwary.

Having country-specific sectors will make it much easier for advisers and investors to compare and contrast funds purporting to offer this expertise, particularly as they grow in number. And that will be ever-more important as investors work out how best to secure exposure to these markets as their own weightings to them increase.