Diversifying your portfolio with foreign investments is a good way to hedge against the risk that comes with solely investing in the domestic market. Emerging markets, in particular, present quite interesting opportunities for UK investors owing to their huge growth potential. If you are looking for some exposure to these markets, Freetrade has identified three investment trusts that they think are worth a look.
What is an investment trust?
An investment trust is basically a type of fund set up as a company in its own right.
Investors can buy shares in an investment trust just as they would buy the shares of another publicly traded company.
The fund tries to make money for its shareholders by investing in a portfolio of shares, or other types of assets chosen and run by the manager of the fund. So when you buy a share in an investment trust, you are essentially buying a piece of its portfolio. You stand to make gains if the portfolio’s value goes up.
Why consider investing in emerging economies?
It’s simple.
As these markets increasingly create new wealth for themselves, investors can benefit from the growing number of new consumers and their ability to spend on items they couldn’t previously, and thus from the growth of companies that step up to fulfil these increased consumption needs.
Which three investment trusts should investors consider?
1. Fundsmith Emerging Equities Trust (FEET)
According to Freetrade, fund managers Michael Obrien and Sandip Patodia try to identify and invest in companies making money through “a large number of everyday, repeat and relatively predictable transactions”.
Focus is almost exclusively on consumer stocks. The priority of the fund’s managers is on companies that are set to benefit from a rise in consumption in developing countries.
For example, the fund recognises that Latin America is the world’s fastest-growing region for e-commerce. As a result, one of the fund’s key positions is in MercadoLibre, dubbed the ‘Amazon of Latin America’.
The fund also has shares in Foshan Haitian, a leading presence in the Chinese condiment sector and the world’s largest sauce maker.
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2. Fidelity China Special Situations Plc (FCSS)
Managed by Dale Nichols, this trust focuses mainly on China, where the fund manager actively hunts for companies that are contributing to the country’s growth.
According to Freetrade, this hunt often leads him to lesser-known, unlisted or small-cap names. As a long-term investor, he is content to stick with these companies until they go public, at which point investors can expect to see good returns on their investment.
This is indeed one key area where investing in a trust such as FCSS can add value. Through the fund, everyday investors are able to get access to private markets. This would be difficult if they tried to do it outside the fund.
Nichols predicts that post-pandemic, China will be one of the biggest beneficiaries of the shift toward online services such as e-commerce. His large stakes in Alibaba and Tescent attest to his conviction.
He also expects the rise in China’s middle class to usher in massive growth in the wealth management, insurance and travel sectors.
This is reflected in the fund’s investment in companies such as Ping An and China Pacific Insurance.
3. JP Morgan Emerging Markets Investment Trust
According to Freetrade, the fund’s manager, Austin Frey, who has been at the helm for 27 years, focuses on high-quality emerging market companies with the ability to bring sustainable long-term returns.
Frey believes that a long-term approach is the most dependable way to create wealth for the fund’s investors. This is especially true in emerging markets where short-term market swings are quite common.
And so, Frey does not let any near-term hurdles distract him from long-term thinking. Instead, he focuses on evidence-based stock selection, targeting companies with solid fundamentals and long-term growth potential.
How do I invest?
Investing in any of these investment trusts is very simple. All you need is a Freetrade share dealing account or a stocks and shares ISA. Simply log in to your account, search for the fund you want and choose the amount to invest.
Of course, past performance is not an indication of future results. If you decide to take the plunge, don’t forget to do your homework before you part with your cash.
