The emerging markets is a growth story that has excited investors like no other. Typically used to describe parts of Asia, South America and Eastern Europe funds investing in the region have returned more than 200 per cent on average in the past seven years, according to Money Observer data.

With the UK and European markets stymied, investors are increasingly turning towards Asia and other developing economies to find growth. Recently, Chinese equity funds saw the largest inflows since the start of 2010, according to research at Emerging Portfolio Fund Research, and the Investment Management Association (IMA) global emerging markets sector has enjoyed net inflows of £650 million so far this year.

Emerging markets basics

The ‘emerging markets’ are countries with developing economies. They include the Asia (excluding Japan) regions, as well as Eastern Europe, the Middle East and Latin America. The MSCI Emerging Market Index consists of 21 countries, and is a good barometer of which countries are considered ‘emerging’. They are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

‘In recent years there has been a big focus on four countries in particular – Brazil, Russia, India and China,’ says Martin Bamford, director of IFA Informed Choice. ‘These so-called “Bric” economies often make up a large part of emerging market equity funds, with some funds consisting entirely of investments in companies from these countries.’

According to research from Neptune Investment Management, the world’s emerging economies will contribute more than 60 per cent of the world’s growth by 2014. But what’s the secret to their stratospheric growth? Asian economies, unlike the UK or the US, are continuing to grow at healthy levels and personal debt is not at the same levels as the West. The middle class of the emerging markets is growing, and they are enjoying improving incomes. In essence, there’s a big sea change happening. Emerging countries, particularly those in Asia, are becoming consumers and spenders, rather than just exporting goods to the West.

How to access emerging markets

‘ In the past emerging markets funds would have been considered as too high risk for many investors,’ says Patrick Connolly, chartered financial planner at AWD Chase de Vere, but this is no longer the case. ‘Emerging markets are becoming an increasingly important part of the world’s economy, there is a case for most investors, including novice investors, to have some money there.’

The simplest approach is through a diversified fund or trust, and there are lots to choose from. Over the past 10 years, the average fund in the global emerging markets sector has returned 263 per cent. Some investment managers offer single-country funds, such as the Allianz RCM Brazil fund, Fidelity China Special Situations or Jupiter’s India fund, which are aimed at investors who would like very specific exposure to a certain country. ‘However, with these market specific funds, the investor enjoys all the upturn of a market but also all the downside,’ says Danny Cox, head of advice at Hargreaves Lansdown.

Other investment managers offer global, generalist emerging market funds. As it’s impossible to foresee what will happen in the market, or which emerging economy will perform best going forward, a diversified fund investing across a diversified selection of countries is often the best start. Aberdeen Asset Management, First State, Schroders and JPMorgan have offered emerging market products for some time and are considered experts in the field.

‘Aberdeen Emerging Markets is a generalist fund where the management team can choose whichever emerging markets they feel offer most value,’ says Cox. ‘This allows the team to offer a very diverse fund and make strategic calls when necessary – if they don’t like a market they can limit their exposure.’ Its performance is noteworthy: over the past seven years, the fund has returned more than 300 per cent, well above the sector average.

Over the past seven years, three closed-end investment trusts have returned over 200 per cent, according to Money Observer data. They are: Genesis Emerging Markets, JPMorgan Emerging Markets and Templeton Emerging Markets. In particular, Templeton Emerging Markets, run by award-winning fund manager Mark Mobius, has a good record over the long-term, returning 263 per cent over seven years.

The Bric regions have spearheaded the emerging market theme, with Michael Konstantinov, manager of the Allianz RCM Bric Stars fund, noting that their economies are on a ‘superior’ growth path. ‘Bric equity markets offer the best valuations within emerging markets,’ he says. ‘The growth will be driven increasingly by the Bric consumer, which is becoming ever more important within a global context as they represent around 42 per cent of world population. These economies remain the best economic growth prospects within emerging markets and offer a unique buying opportunity at present.’

A globally-focused generalist fund isn’t the only way to invest in the emerging markets. With developing economies accounting for a high percentage of the world’s commodities, investors can play the emerging market theme through a natural resources fund. Similarly, emerging markets are huge consumers of luxury branded and designer goods. Investing via a premium brand fund, such as Pictet Premium Brands or Julius Baer Luxury Brands, are biased towards the emerging market consumption story.

Giles Marriage, associate director of Thesis Asset Management, highlights an overlooked option to invest in the emerging markets – via shares of leading UK-listed companies. ‘Businesses like Vodafone, Unilever, Rio Tinto and BHP Billiton, to name a few, are all benefiting from emerging market economic growth and are strategically focused on developing within these countries,’ he says.

In addition, it’s possible to buy individual overseas shares through a platform or a broker. However, accessing overseas stock markets can be expensive and dangerous, says Adrian Lowcock, senior investment adviser at Bestinvest. ‘There are additional transaction costs and it is difficult to conduct thorough research from the UK, even though the internet gives a lot of information it does not provide an insight into the mood in the region,’ he says.

What investors should be aware of

Emerging markets don’t suffer from the same debt problems that have been plaguing the Western world, but typically, developing economies have a poorer level of corporate governance and unstable political situations. As a result, emerging market funds are usually more volatile than UK funds, and there is an additional exchange rate risk when investing in a fund.

‘Investors should consider these long-term investments for around 10 years or more. Emerging markets are particularly good for regular savings such as pension funds, which benefit from the additional volatility and risk,’ says Cox.

‘Investors often find these markets attractive because of their fast growing economies and exciting opportunities for companies to access a big population,’ Bamford adds. ‘The risks of investing in emerging markets can be substantial, so restricting any holding to a maximum of 10 per cent of your portfolio makes sense.’

As for individual funds, Lowcock recommends First State Asia Pacific Leaders – ‘a more defensively managed fund which has an experienced manager, able to protect the fund in falling markets’, Fidelity South East Asia – ‘a more adventurous fund seeking long-term capital growth, outperforming in rising markets’, and Newton Asian Income, which produces an attractive yield of 6 per cent.

Cox suggests, alongside Aberdeen Emerging Markets, Aberdeen’s Latin America fund, which invests around 65 per cent of the fund in Brazil. Connolly suggests JPM Emerging Markets and First State Global Emerging Market Leaders.

Bamford also suggests the Aberdeen Emerging Markets fund, because it has a good spread of exposure across the various emerging market economies, including Asia and South America, and has delivered first-quartile performance over the past one, three and five years.

While some experts have debated whether the emerging market bubble is ready to pop, others think the investment story will continue to run and run. But, as Neptune highlights, emerging markets will account for more than 60 per cent of the world’s economic growth over the next few years. Lowcock sums up: ‘Long term, the investment opportunity looks very attractive.’