Despite spectacular growth during the past 12 months, equity markets have not been kind to investors during the past 10 years. The decade started with the excitement of new company start-ups in the dot-com era, but investors suffered horribly as the tech bubble burst and equity prices fell dramatically in March of 2000. At its peak, the FTSE100 reached 6,738 Now, 10 years later, it is around 5,578, still some way off this high. Similarly, the S&P500 at 1,149 is still some way off its 2000 peak of 1,527. With this kind of performance over 10 years, investors can be forgiven for being reluctant to invest in equities.
But not all equity markets suffered in the same way. In fact, some did very well. According to data provided by Morningstar, the financial reporting company, the best-performing offshore fund in the past decade was Parvest China Classic, with a compound average annual return of 26.2 per cent. Funds such as this one, which invest in the Chinese stock market or in foreign companies that feed off the "China effect," accounted for seven of the top 20 funds in the Morningstar list. While most expatriates will never have heard of the Parvest fund, they should be more familiar with the other Chinese funds, namely First State China Growth and Baring Hong Kong China Fund, which are commonly available through the investment vehicles offered by offshore insurance companies such as Royal Skandia or Friends Provident.
Emerging market funds dominated the performance table, accounting for 11 of the top 20 funds. Those which specialised in Russian equities provided three funds in this sector, including the top two from Baring and JPMorgan. With compound growth rates of 25.4 per cent and 22.3 per cent annually, respectively, over the 10-year period, their performances were not far behind that of the top Chinese fund. Funds that specialised in Latin America, India and Eastern Europe (excluding Russia) made up the rest of the emerging markets sector, with eight funds in the top 20.
Two funds stopped this competition from being a complete whitewash by Chinese and emerging market funds - both of them from the highly successful Blackrock (ex-Merrill Lynch) stable. The World Gold Fund invests at least 70 per cent of its total assets in the equity securities of global companies, whose predominant economic activity is gold mining. It may also invest in the equity securities of companies that specialise in the mining of other precious metals (besides gold) and base metals. The fund does not hold physical gold or metal. The World Ming Fund has a similar structure, investing in the shares of mining and metals companies.
The above results apply to offshore funds only and exclude institutional funds - they are all available to the average investor, and many of them, as stated above, are easily bought through investment vehicles offered by offshore insurance companies. The results are interesting, because they demonstrate the need to be invested in the right asset class rather than the right fund manager. The reason that a fund appears in the top 20 has more to do with the choice of sector than the choice of manager. For comparison, the best-performing US Large Cap fund returned 2.6 per cent each annum over the decade and the top US Small Company fund returned 10.9 per cent each year.
Ten years ago, China and emerging markets were considered to be high-risk markets. They still are, but perhaps a little less so. Similarly, small companies, anywhere in the world, are considered to be higher risk than large capitalised companies. Yet both of these risky sectors produced growth in excess of conventional equity markets. This is the way it should be; The capitalist system in which we live rewards takers of risk. (Though remember that this does not hold true in all cases.)
What should the average investor learn from all this? The obvious conclusion is that if you have time on your side, make sure that your portfolio includes some high-risk, high-growth assets. In my view, a US dollar investor with a growth attitude to risk should have for 25 to 40 per cent of his portfolio in China, emerging markets and natural resources. Bill Davey is a financial adviser at Mondial-Financial Partners Dubai. If you have any questions on this article or any other financial matter, write him at bill.davey@mondialdubai.com