Instead, key industry figures are calling on institutional investors to help “shoulder the burden” of boosting the performance of lacklustre UK equities, and believe the simplest solution to encouraging more retail money into the home market is to abolish stamp duty and increase the tax-free threshold of the original ISA.

Days before Chancellor Jeremy Hunt’s Autumn Statement in November last year, it was widely expected he would announce the launch of a British ISA, which would allow investors to increase their £20,000 tax-free limit by £5,000 in order to invest in UK stocks, in a bid to bolster the ailing home market.

See also: Pridham Report: ‘Bruising’ 2023 sees record outflows for UK fund industry

This was notably omitted from the statement, however, with Chancellor Hunt instead pledging to “simplify the [ISA] scheme” and “widen the scope of investments that can be included in ISAs”. Confirmed changes from the 6 April this year include permitting multiple subscriptions to ISAs of the same type each year; and enabling savers to hold LTAFs and open-ended property funds with extended notice periods within Innovative Finance ISAs. ISA, Lifetime ISA and Junior ISA annual subscription limits remained unchanged at £20,000, £9,000 and £4,000 respectively.

The reason British ISAs were left out of the Autumn statement became apparent at the end of last month, however. According to a report from The Telegraph, Prime Minister Rishi Sunak has pushing back against HM Treasury over the scheme, which allegedly would have been rolled out from the start of the 2025/26 tax year – beyond the date of the upcoming general election. Concerns cited by the No.10 officials, according to the report, include dictating where investors should put their money, and a lack of appetite for the launch of a new ISA product.

Now, ahead of the Spring Budget on 6 March, platform providers and senior investment professionals are calling for the British ISA to stay firmly off the cards, with many warning they could have negative implications for investors.

Tom Selby, director of public policy at AJ Bell, calls the concept of a British ISA – sometimes referred to as a GB ISA or BRISA – “a bad idea”, although says it is not exactly clear yet what the scheme would propose.

“Some have suggested this could mean an extra ISA allowance to invest in UK companies and funds, which would increase complexity,” he explains. “Others have argued ISAs should only be allowed to invest in UK companies and funds, significantly reducing the ability for investors to diversify globally. Both would be retrograde steps and should be resisted by the government.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says: “It’s not surprising there appears to be scepticism about the plan right at the heart of government. The economy is clearly in need of an injection of investment to help drag economic growth out of a stupor, but mooted plans for a British ISA to help direct investors’ money into UK-listed companies adds unnecessary complexity, could fail to achieve its aims, and could have a negative impact on UK investors.”

Concentration risk

One of the key criticisms of a proposed British ISA is the concentration risk it could expose investors to – made worse by the fact the UK stock market has been so volatile over recent years. According to data from FE Fundinfo, the MSCI United Kingdom index has a maximum drawdown – which measures the most money an investor could have lost had they bought and sold at the worst possible times – of 31.6% over the last five years. Its MSCI World counterpart has a maximum drawdown of 24.6% over the same time frame.

Rob Morgan, chief analyst at Charles Stanley Direct, says: “This is the big issue for me; there has been precious little said in this debate about what is right for the individual.

“A British ISA, if directed at single stocks, corrals private investors into taking on more stock-specific risk and concentrating their portfolios. Most investors are not in a position to navigate the complexities and risks of buying individual shares and are better served by using collective funds and spreading their investment.

“In addition, many investors already have significant exposure to the UK and further investment in this area is neither necessary nor desirable from the perspective of proper diversification.”

Andrew Prosser, head of investments at InvestEngine, agrees, adding that for an ISA to work best, investors should hold a globally diversified portfolio.

“If an equity investor managed to fill their regular ISA by investing in a global portfolio, and then also filled up their British ISA, the resulting portfolio would have an allocation of over 20% to UK equities. This is a significant deviation from the UK’s weight in the global equity market, which currently stands at just over 3%,” he explains.

“Investors may also be tempted to fill their British ISA before contributing to their regular ISA, which would result in even more concentrated portfolios. This ISA is encouraging savers to take large active positions within their portfolio for protectionist reasons. Home bias is already an issue for British investors, and this would exacerbate the issue.”

Indeed, Streeter concurs that UK investors are already firm backers of the London Stock Exchange, with 1 million of Hargreaves Lansdown’s 1.8 million clients currently invested in UK equities. This accounted for 80% of the platform’s trades in the last year, with 70% of investors holding at least part of their position in a company for more than 12 months.

Sheridan Admans, head of fund selection at Tillit, says: “While the BRISA poses an interesting possibility for encouraging investment in UK companies by UK savers, without more detail it seems like a great deal of expectation is being put on the shoulders of retail investors to come to the rescue at a time they are being squeezed by more immediate demands.”

Will it work?

Admans adds that, according to HM Revenue & Customs data from June 2023, stocks and shares (ex-cash) ISA subscriptions for 2021-2022 totalled approximately £34.2bn.

Given the UK listed market’s mid-2023 market cap of approximately £3.6trn, he says “the BRISA alone may not be the immediate solution to this pressing issue”.

And Jason Hollands, managing director of corporate affairs at Evelyn Partners, warns that UK savers could simply use such an allowance to invest less in UK equities in their core ISA allowance “to compensate for the restrictive nature of a British ISA”.

“A new British ISA would also likely only be utilised by those already maximising their core £20,000 ISA allowance,” he says.

“This is relatively modest number of people in the scheme of things, which also includes those using the £20,000 allowance solely for cash savings, not investments.”

Streeter agrees with Hollands that investors could find a way around compensating for the UK allocation requirements, adding: “Those who already max out their £20,000 ISA allowance could simply hive off all their existing UK holdings to the British ISA, and use the extra wiggle room to invest more overseas in their usual ISA.”

And even then, research from InvestEngine’s Prosser found that fewer than 15% of investors reach the maximum £20,000 capacity in their ISAs, in any case.

The other issue with relying on UK savers to bolster the health of the UK stock market is the FTSE 100’s global nature, with approximately 75% of its revenue being generating from overseas.

Paul Derrien, investment director at Canaccord Genuity Wealth Management, says this is a “big issue”, pointing out there is “significant amounts of overseas earnings in the FTSE 250 too”.

“So, who is this policy benefiting? Maybe there needs to be a restriction on how UK-centric the business actually is, though how this would be applied in practice sounds too onerous.”

AJ Bell’s Selby also says ISA investments into UK-based companies “will not necessarily result in a substantial boost” to UK firms, given FTSE 100 companies are “generally international businesses”.

Creating complexity

There will be creases to iron out when it comes to the design and implementation of the British ISA – if it ever comes to fruition. Details on the product so far are scant, although several commentators fail to see a fool-proof way for the product to improve UK stock market performance while simultaneously benefiting investors.

“What constitutes a UK investment? UK-listed shares or a subset? Would investment trusts or other collective vehicles be included?” Charles Stanley’s Morgan asks. “Would this be a separate extra allowance or part of an expanded ISA wrapper? The former would create yet another product and the latter would represent a challenge for monitoring and reporting.

“Any segregated allocation would rise and fall at a different rate to the rest of the investments in an account, and selling and buying activity would further complicate matters.”

Not only could providers come up against challenges, for the investor themselves, there is the additional argument that another ISA will only increase complexity – contrary to Chancellor Hunt’s pledge to simplify the initiative. To date there are five different types of Individual Savings Accounts: Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, Junior ISAs and Innovative Finance ISAs.

“The British ISA complicates the already convoluted world of tax wrappers when really the government should simplify the regime,” says InvestEngine’s Prosser.

“Instead of progressing with a British ISA, the government should streamline the ISA wrapper by only having one type of ISA to cover savings and shares, with a single annual limit and education cues about what investors can use their ISA for.”

Morgan agrees that a British ISA “is at odds with calls for ISA simplification”.

“Over the years a once-simple ISA regime has morphed into a many-headed beast with such variations as Help to Buy, Innovative Finance and Lifetime ISA popping up, potentially exacerbating lack of consumer understanding.”

James Yardley, senior research analyst at Chelsea Financial Services, says: “It sounds rather complicated and highlights a potential risk of this strategy by the government.

“The great success of ISAs has come through their simplicity. They’re easy to understand and implement, but as soon as you add in complexity people will switch off. In theory this may be a good strategy, but we will need to see more details first.”

The benefits

Not every aspect of the British ISA has been met with criticism. Yardley reasons that it could have “a much-needed positive impact on investor sentiment” towards the UK stock market.

“It will encourage people to invest in the UK,” he says. “A lot of people who should be investing don’t, which is a crying shame because it causes them to have much worse financial outcomes throughout their lives. ISAs are a great vehicle for people looking to start their investment journeys with freedom from capital gains and income tax.

“We need a stronger UK stock market that allows British companies to access capital markets and grow more efficiently. What has happened to the UK market has been a self-inflicted calamity.”

According to data from Statista, the number of companies trading on the London Stock exchange between January 2015 and July 2023 has fallen from 2,429 to 1,900 – a 21.8% decline. Meanwhile, a survey from the Quoted Companies Alliance published at the end of last year found one in four listed UK small- and mid-cap businesses saw no benefit in being publicly quoted.

Canaccord’s Derrien also believes the British ISA could encourage investment back into UK firms, which could therefore “potentially stem the tide of companies not being listed in the UK”.

Mike Coop, chief investment officer at Morningstar Investment Management EMEA, says UK equities offer “a long history of innovation and commercial enterprise, as well as safeguards for investors”, despite negative sentiment. He therefore says a tax-effective way to gain access to British companies “would be welcome”.

“The research we use when we’re building portfolios for advised investors indicates better value on offer for UK listed companies at current prices than many other markets, so there is a return potential and, for those seeking income, the UK does offer currently a higher level of yield than many other markets,” he points out.

Dan Moczulksi, UK managing director at eToro, argues that if the British ISA is built in the correct way, retail investors “should not have to take any additional risk”.

“They should still be able to invest their core ISA allowance in whatever way they see fit and then have the choice of using an additive allowance for UK-listed companies,” he says.

“Any new vehicle which incentivises more investment in UK-listed companies obviously stands to benefit these companies. It’s a virtuous cycle. More investment in these firms means more capital for them to deploy, helping them to grow. It also means share prices move higher, attracting further investment for retail investors seeking good returns.

“This in turn makes the UK a more attractive place to list as a business, as firms feel confident that their share price will improve and they will attract a lot of investment. Big, well-known companies listing in the UK would then attract more attention from retail investors, and the cycle goes on.”

Remember PEPs?

While there is widespread agreement that something must be done to improve sentiment towards buying into UK stocks, some commentators says the scheme is reminiscent of Personal Equity Plans (PEPs).

Launched by the UK Government in 1992, the initiative was designed to encourage investment from UK savers into the home market via various tax incentives. However, the scheme was scrapped in 1999 and replaced with the ISA.

Charles Stanley’s Morgan says: “Rewinding back into the midst of time, this was the logic behind merging the Single Company PEP allowance with the General PEP to ultimately create the ISA in the first place.

“Investors were experiencing a wide range of outcomes with Single Company PEP, and it was decided that freedom of choice to encompass collective vehicles was preferable.”

Canaccord’s Derrien adds that, over time, the restrictions on buying UK businesses were removed as the product transitioned into the ISAs we have today.

Fixing the conundrum of the UK stock market

If the UK stock market is in dire need of revival, but a British ISA is not the tool to do so, is there anything else the government can do to breathe life back into our listed companies?

“Yes. A lot,” says Chelsea Financial Services’ Yardley. “They can eliminate stamp duty; reform the horrendous cost disclosure rules that disadvantage the investment trust sector; and empower a new generation of investors by enhancing financial education and encouraging people to move their Junior ISA investments out of cash and into the stock market.

“They can also incentivise pension funds to invest in UK stocks – perhaps starting with the pension funds of MPs.”

Other investors agree that targeting retail investors is not the right course of action, with Morgan concurring that while UK investors have a decent exposure to their home market, “pension funds have little”.

See also: The Lang Cat: Advised platforms suffer record outflows in 2023

Tillit’s Admans says: “Perhaps it’s time for the government to play a more proactive role in encouraging institutional participation in the UK stock market, directing more attention towards stimulating overall economic growth, and considering measures to ease interest rates and alleviate the pressure on living costs.

“Although the UK market presents itself as cheap, there’s a need for a more immediate and strategic catalyst to attract both local and international institutional investors to bump up valuations, rather than placing this burden solely on UK savers, especially amid a cost of living crisis and at a point in time where consumers are faced with higher mortgage rates. The cost of living alone saw £6bn less contributed to cash ISAs in the last financial year compared to the prior year.”

On the education front, InvestEngine’s Prosser says: “We would like to see more provisions for better financial education. Boosting it from an earlier age would enable more people to understand the benefits of long-term investing and move us away from being a nation where saving in cash is the default option.

“As part of this, consideration could be given to renaming ISAs to ‘Tax Free Accounts’ to make clear the main benefits of using them in order to increase engagement.”

Morgan says it is “no wonder” that private investors feel “increasingly put upon”, given recent significant cuts to capital gains and dividend allowances.

“Perhaps a more generous CGT rate or allowance for new holdings in UK stocks could be implemented, if held for a certain period,” he reasons. “The focus on capital gains would also naturally attract capital to more growth-orientated and smaller companies than on dividend-paying mature companies, but by simultaneously increasing the dividend allowance there could be a broader effect if desired.”

Evelyn Partners’’ Hollands says a British ISA would have to be accompanied by a wider package of reforms if it is to “move the dial” on UK stocks, which should include removing stamp duty on UK share purchases or “giving favourable tax treatment to UK shares in respect of inheritance tax or capital gains tax”.

eToro’s Moczulksi agrees that abolishing stamp duty when investing in UK-listed companies through the BRISA would “undoubtedly be an effective incentive”.

“Government contributions could also be the answer, adopting the same approach as a LISA, with the government contributing an additional 25% a year up to £1,000.”

Overall, however, the message from commentators seems to be clear: an increase in the original ISA’s tax-free threshold could solve a multitude of the UK stock market’s ailments. The allowance was last lifted almost seven years ago – to £20,000 in April 2017, from £15,000 just three years previously, and from £11,880 before that.

AJ Bell’s Selby says: “Given most investors have a natural bias towards UK companies and funds anyway, the most straightforward answer would be to simply to increase the ISA allowance.”

Hargreaves Lansdown’s Streeter adds: “Simply lifting the ISA allowance, without creating a new product, would result in a boost to investment in UK equities anyway. It would also still offer the potential for diversification, helping bolster retail investors’ resilience.

“Not putting all your eggs in one basket is one of the golden rules of investing, and it’s crucial that government policy continues to support that.’’

HM Treasury’s press office has been contacted for comment.

This article was written for our sister title Portfolio Adviser

Advertised almost as the multi-asset option for fixed income, this is because funds in the IA Strategic Bond sector have the flexibility to invest across the entire bond spectrum from the safety of government bonds, to credit and high yield.

However despite rises in bond yields and interest rates over the last 12 months, the popularity of the IA Strategic Bond sector has nosedived in 2023, with the sector seeing net outflows of some £2.2bn over the year to October according to latest data from the Investment Association (IA).

So is this a case of investors preferring to do their own allocation, or are investors still wary of fixed income in general after the asset class posted a 23% loss in 2022?

Chris Metcalfe, chief investment officer at Iboss, said for several years up to the period when  most believed inflation was going to be transitory, it had a relatively small allocation to strategic bonds.

“Managers in this space have two primary sources of alpha: duration and credit quality,” he said. “The potential to add significant value by playing duration was minimal, but that all changed following Powell’s inflation epiphany at the end of 2021.”

Metcalfe added another cause of its reluctance to embrace active managers in the strategic bond space was that many feared getting too far away from their peer group. 

“Some appeared to take insufficient risk and remained longer duration than either they needed to or than proved advisable with the benefit of hindsight.,” he said.

As a result, Metcalfe said Iboss brought in more passive short-duration funds as it never subscribed to many central banks’ assertions about inflation being permanently conquered. 

“While prepared to make these moves, we prefer to leave much of the tactical heavy lifting to the active strategic bond managers,” he added. “It may be that other discretionary managers feel similarly let down by many of the active managers, hence the large amounts of withdrawals in 2023.”

As a result over the last few quarters, Metcalfe noted Iboss has been increasing its allocation to active strategic bond managers, with the latest addition being the M&G Optimal Income fund, managed by Richard Woolnough.

“Managers now have a complete toolkit to produce alpha as volatility in the bond markets remains high,” he said. 

“Even with the stellar returns from fixed income since Powell once again turned dovish at the end of October, we remain optimistic for this sector for 2024,” he added.  “We expect inflation to remerge at some point, but that is an issue for another day.

Following one of the worst markets for bond investors in over four decades, Darius McDermott, managing director of Chelsea Financial Services, said 2023 has seen a significant turnaround in fortunes for fixed income. 

“The outlook for fixed income is expected to continue on this positive trajectory in 2024 as the market consensus is that interest rates have peaked and inflation will moderate, creating a favourable environment for bond investors,” he said.

While noting those investors in search of a “one-stop shop” for their fixed income allocation may prefer to use a strategic bond fund, he added the managers utilising this flexibility can take strikingly distinct approaches. 

“Two funds we like within the sector are the Baillie Gifford Strategic Bond and Nomura Global Dynamic Bond funds, both of which take contrasting strategies,” McDermott said.

For example he said the Baillie Gifford Strategic Bond fund aims to produce a monthly income from a concentrated portfolio of mainly UK fixed income securities. 

“Stock picking is the primary focus of the fund’s managers, Torcail Stewart and Lesley Dunn, and this helps set them apart from many of their peers,” he said. “They look to take advantage of inefficiencies at the stock level and believe that detailed research can enable them to deliver consistent outperformance.”

McDermott said he likes this approach because trying to forecast interest rate movements and second guess central bankers is “notoriously difficult”.

He added the Nomura Global Dynamic Bond fund, on the other hand, takes an unconstrained, global approach to its pursuit of total returns. 

“Manager Richard ‘Dickie’ Hodges assesses the global economy to identify attractive sectors and themes and then uses fundamental analysis to find the best ideas,” McDermott said. “He also invests across the entire bond range, including government and corporate bonds, as well as emerging market products and inflation-linked assets.”

The end result for McDermott is that investors seeking nuanced and diversified exposure to fixed income may find strategic bond funds valuable. 

“However, the sector’s diversity in styles and approaches requires careful selection to align with individual investment preferences and risk tolerance.”

]]> https://international-adviser.com/too-early-to-jump-into-esg-with-both-feet/ Thu, 18 Nov 2021 11:01:09 +0000 https://international-adviser.com/?p=39626 As the dust settles from the 26th Conference of Parties (COP26) in Glasgow, multi asset managers say it will take time to understand what impact the agreed pledges will have on investment markets.

While COP26 looks to have more political than investment impact, Chris Rush, investment manager at Iboss, said investors would be unwise to ignore the outcomes of the event. Instead, to reflect the changing mindset as things progress, he said investors should consider an ESG perspective when selecting investments.

“However, we would caution against packing all your belongings and throwing them onto the ESG bandwagon,” he said. “Many of the discussion points and agreements are likely to tale a long time to come to fruition.”

He added that depending on their exposure to traditional resources, some countries and industries will take longer to adapt than others.

“The initially more extreme wording surrounding coal at COP26 was watered down by the close,” Rush said. “Some countries like Canada have faced both internal and external criticism regarding the severity of the climate action they have proposed.

“As multi asset investors, we feel it is essential to maintain diversification whilst acknowledging the growing influence of the ESG agenda,” he added.

Low cost power

For Ryan Hughes, head of investment research at AJ Bell Investments, the immediate takeaway from COP26 is that it will be the capital markets that provide a vast amount of money to drive the energy transition.

“There are already huge sums going into decarbonisation products and this will only accelerate in the coming years, which should provide a long-term tailwind to those companies involved in this space,” he said.

Hughes added that it was disappointing to see the likes of China, India, Russia – and in some instances the US – not sign up to some of the key pledges, with their desire to continue strong economic growth outweighing their impact on the planet.

“For China and India, access to low cost power is vital for their continued growth and their rise to being the largest and third largest economies in the world by 2030 look unencumbered,” he said.

“I am sure ESG investors will be looking closely at these countries to see whether the politicians actions are enough to drive meaningful change and keep even their weaker pledges on track,” he added.

Energy transition

In terms of assets, Darius McDermott, managing director of Chelsea Financial Services, picked out infrastructure as being in a good place after COP26.

“There are significant opportunities around the world in the energy transition and the sector is uniquely positioned to capitalise on the move to a greener energy mix,” he said.

“While all the focus has been on the US trillion dollar infrastructure bill, it’s not clear when or how that money will be seen and used,” McDermott added. “As such, the more immediate opportunity is in renewables, and in the EU with the direct EU fund payments for a sustainable/green recovery.”

Indeed, McDermott noted that many investment trusts in the renewables space are trading on yields north of 5%. In a world of zero at the bank, he argued this is very attractive.

“Before the event, the manager of FTF Clearbridge Global Infrastructure Income did say that he expected to see a lot of hot air (no pun intended) and not much action from the event itself,” McDermott said. “He thought more changes would instead come from businesses post the conference. So while it may seem a bit disappointing now, don’t assume it is over.”

Sustainability stand off

While governments have a key role to play, Justin Onuekwusi, head of retail multi asset funds at LGIM, said it feels that change will also need to be, in part, led by the private sector.

“The asset management industry has a key role to play in this,” he said. “As stewards of investors’ capital, it is only right that larger asset managers must take responsibility in engaging with business to help drive the change we want to see.”

In term of the summit itself, Onuekwusi noted while there were positives from the last couple of weeks, he added there now appears to be a stand off.

“The larger emerging economies point to the unfairness of the total cumulative emissions of the wealthier economies since the industrial revolution, which dwarves their own,” he said. “As such they are demanding that the $100bn economic costs agreed need to be shared more.”

Kelly Prior, investment manager in BMO Global Asset Management’s Multi-Manager team, says: “Looking under the bonnet of this headline figure, our research showed that the three most consistently top quartile IA £ Corporate Bond funds are long duration focused.”

These were the Schroder Institutional Long Dated Corp Bond, F&C Institutional Long Dated Corporate Bond and Pimco GIS UK Long Term Corporate Bond funds.

“Looking ahead it will be interesting to see if this trend is repeatable,” Prior says.

Long duration support

Schroder Institutional Long Dated Corp Bond manager Alix Stewart argues long dated bonds are likely to remain well supported, especially over the medium to long-term with the Bank of England being much slower to raise rates than expected.

Stewart says: “With the uncertainty over Brexit and the recent turmoil in Chinese and other emerging markets causing question marks over the sustainability of the synchronised global growth environment, we are unlikely to see a similar duration sell off.

“It has been fashionable to call for the end of the bond market rally for several years now and while it’s true that rates have been rising in the US causing duration to underperform over the past year, longer dated bonds have performed much better than shorter dated bonds.”

But Pimco GIS UK Long Term Corporate Bond manager Ketish Pothalingam says central banks are slowly reversing their accommodative policies.

“Against this backdrop, credit spreads remain close to their long-term average and offer less compelling spread compensation versus their long duration.

“We do not see central banks raising rates to levels seen in previous tightening cycles and as a result we do not see significant risks to bond yields rising sharply from their current levels, we are also wary of having significant exposure to long dated credit right now.”

From tailwind to headwind

Prior says: “Given longer duration funds have greater sensitivity to interest rates, the change in environment from falling to rising interest rates means the tailwind of falling interest rates will change to a headwind for strategies with a focus on longer duration.

“Should we see a change in the expectations of future interest rates and therefore a shift in the yield curve it would take a very different mandate to outperform in both areas of investment.”

Adrian Lowcock, head of personal investing at Willis Owen, says markets go through periods where they believe the US Federal Reserve is either spot on or behind the curve.

“Depending on which school of thought is dominant will drive different parts of the bond market.  If you can get the predications correct you can profit from the changing outlook.  This has been hard for managers to do.”

Slashing exposure

Richard Flax, chief investment officer at Moneyfarm, has a preference for low duration due to the normalisation of interest rates.

He says: “We recently sold part of the global government bond exposure in our lower risk portfolios, given the current flatness of most yield curves, reducing both EU exposure and vulnerability to interest rate rises.

“This is against a backdrop of a spike in European bond rates due to increased political tensions.”

Flax says short-dated US Treasury bond yields are at their highest since 2008, as the markets start to price in the possibility of four rate hikes by the Fed in 2018, and he increased portfolio exposure here as a result.

Passive vs Active

Meanwhile, for passive investors, governments and corporates issuing low coupon, long-dated debt has pushed up duration in many products.

As passive bond funds have high duration, Prior says they “lack the ability” to protect capital in a rising interest rate environment.

Darius McDermott, managing director at Chelsea Financial Services suggests investors look for short-dated trackers.

McDermott adds he doesn’t expect individual funds to deliver a consistent top quartile performance each and every quarter because sectors, styles and asset classes come in and out of favour.

“Markets can be irrational, and it is not possible to predict every event and know which ones will have the most impact on markets. That is more the job of a multi manager who can blend funds to smooth out performance and provide diversification.”

For more insight on UK wealth management, please visit www.portfolio-adviser.com

But not all investors like to leave their geographical allocation up to the fund manager.

Jupiter Merlin head of strategy John Chatfeild-Roberts has long advocated using regional funds to allocate emerging markets in order to access the most attractive regions rather than every market within the sector.

“Have I ever bought a GEM fund? I must have in the past at some stage, but generally not.” However, Chatfeild-Roberts adds “in investment one should never say never”.

The Sicav range, headed by Algy Smith-Maxwell, introduced Jupiter Global Emerging Markets, managed by Ross Teverson, around a year ago.

Asia dominates

The Jupiter Merlin Growth fund currently holds 8.1% in Asia and emerging markets, while the Worldwide portfolio holds 14.5% in the asset class.

The Invesco Perpetual Asian fund, managed by William Lam, which was introduced to the portfolios in February, and Stewart Investors Asia Pacific Leaders account for most of the allocation, alongside a small holding in Findlay Park Latin American.

In contrast, Tilney likes to trust the judgement of its selected fund managers to allocate where they see the greatest opportunities, says managing director Jason Hollands.

It invests in Fidelity Emerging Markets, managed by Nick Price, and Somerset Emerging Markets Dividend Growth. However, it also has allocations to Asia funds, which invest across developed and emerging markets, including First State Asia Focus, Schroder Asian Alpha Plus and Stewart Investors Asia Pacific Leaders.

Asia ex-Japan equity was the most popular type of regional fund within emerging markets over the last year, attracting €9.5bn, according to Morningstar data, and China was the most popular country category, landing €1.5bn into A-shares funds, €479m into Greater China funds and €20m in straight China equity funds.

However, the worst performing regional fund category was Asia Pacific incl Japan, which suffered outflows of €3.5bn over the 12-month period to January.

Portfolio kickers

Neptune India fund manager Kunal Desai says investors tell him they have a core allocation to emerging markets through a global fund and use individual market kickers as a boost to their portfolios.

Desai says India has a lower correlation than some of the “classic” emerging markets, which is helpful for diversification.

“This is because it’s a commodities importer and it’s also very domestically driven. What Trump decides to tweet at 4am in the morning doesn’t have any impact on its growth trajectory,” he says.

India has been one of the few regional funds that have attracted Chelsea Financial Services clients’ interests over the last three to four years, according to managing director Darius McDermott, with Goldman Sachs India and Jupiter India particular favourites.

India was the second most popular country after China over the last year, attracting €1.8bn, according to Morningstar.

Chatfeild-Roberts notes the recently added Invesco Perpetual Asian fund holds relatively less in India than the Stewart Investors Asia Pacific Leaders fund, with 7.9% in the former and 31.3% in the latter.

Return to favour

“Emerging markets have been very unloved, particularly regional funds and they are starting to gain more interest,” McDermott says.

McDermott says whether they choose regional or global emerging market funds in the Chelsea Managed Funds range varies depending on the risk profile.

“We’ve got a small allocation in our Cautious portfolio to the Henderson Global Emerging Markets fund. Because we know the manager is not a heavily momentum, growth-driven fund, it’s always going to take care on valuations.

“In our Aggressive Growth fund, which is our global fund, we don’t mind having direct exposure to Latin America or China or wherever is appropriate.”

The Aggressive Growth fund has 16.2% in Asia ex-Japan and a further 5.7% in the remaining emerging markets.

Hollands says Tilney is currently “relatively positive” on emerging markets as a whole, particularly on valuation grounds.

“However, there are clearly risks to a constructive scenario with some of the recent data coming out of China disappointing and, of course, the prospect of a trade war with the US, which could hurt emerging markets,” Hollands says.

Chatfeild-Roberts describes his view on emerging markets more cautiously as “neutral to negative”, but says he is not particularly positive on any asset class at the moment.