Emerging market investment opportunities are a hot topic right now as investors, advisors and pundits all seem to be projecting great potential there and view them as an opportunity for diversification. However, as is usually our position on these things, fiduciaries need to take a close and discerning eye to them before adding them to a portfolio, and two articles this week provide some great insights for fiduciaries who are considering emerging markets.
First, a U.S. News and World Report piece highlighted five risks faced by emerging market investors: political instability, currency fluctuations, lack of transparency, volatility and additional expenses. Second, a Wall Street Journal article that cautions against tying economic development to investment returns also gave four tips for implementing emerging markets: don't make outsized wagers on them, avoid narrow focus, make a long-term commitment to them, and consider large-cap U.S. equities instead for their dependence on global growth.
Without going so far as calling these two articles exhaustive of the considerations a fiduciary must make regarding emerging markets (maybe we'll hit that topic in a future post), they do offer some good, specific points of consideration a fiduciary should make before diving in head first and generally illustrate the type of mindset a fiduciary should have in considering any non-traditional asset class. Investing in emerging markets offers both the opportunity for improved diversification and additional risks; therefore a fiduciary should only consider them if it first makes sense within the context of a given portfolio and if they are a fully capable of prudently selecting and monitoring this type of investment.
Now on to the rest of the week's best links.
In the news:
- Surprise, FINRA and Investment Adviser Association have different views on who should regulate advisers [InvestmentNews]
- Observers are surprised by SEC suit that may result in a duty for advisers to disclose increase in compensation resulting from going independent [InvestmentNews]
- Why advisers probably should wait on transitioning their registration to state oversight [InvestmentNews]
- The Committee for the Fiduciary Standard's Knut Rostad talks with SIFMA CEO Tim Ryan on the fiduciary standard [Advisor One]
- A former broker who now advises HR departments offers some good tips on advisor selection [Advisor One]
- FINRA's proposed new suitability rule is better, but it doesn't go far enough [Forbes]
- Andy Rice, who won our 2010 Article Competition for an article on Roth conversions, addresses the topic again with eight questions to ask about Roth conversions [Advisor One]
- A list of the top ten trends in wealth management culminates with advisors preparing for the results of the SEC's fiduciary study [Advisor One]
From the organizations/associations/government/academia:
- A good white paper on the legal impact of the DOL's proposed changes to definition of a fiduciary [Stroock & Stroock & Lavan, LLP]
- CEFEX announces fiduciary certifications to Nottingham Investment Administration and Whitney Benefits [CEFEX]
From the blogs:
- A look at new fee transparency rules and why they will work [Boston ERISA & Insurance Litigation Blog]
- FINRA begins social media audits with a focus on LinkedIn [Socialware]
- Some things to think about when considering a Roth 401(k) roll over [Getting your Financial Ducks in a Row]
- For participants: why can't I take a 401k withdrawal? [401k Basics]
- Another great interview by Chris Carosa, this time with Stanford Professor Charles Lee, hitting the subjects of fees, investor behavior, MPT, index investing and more [Fiduciary News]
- Trending topics for ERISA plan sponsors [Fiduciary News]
- Plan sponsor quick tips: abandoned plans [401k Basics]
Have a link we missed? Leave them in the comments section or email us at blog@fi360.com. For more of the best links during the week, make sure you follow us on Twitter.
It seems to me that a good case can be made that NOT including investments in emerging markets is risky for a portfolio, especially in the long run.
The developed world is bogged down in debt, economic paralysis and frightening demographic shifts.
Japan has been in a recession for twenty years. Europe is cracking apart with its own debt problems. Its population is aging. The United States is in the hands of a closet socialist. Though its population is not aging as badly as Europe's, it's still facing far more entitlements than its dwindling younger generations can hope to pay. Immigration will pick up some of the slack, but not all.
Canada and Australia are still major resource centers, but don't have large enough populations.
That leaves the developing world to supply the world with demand and young, cheap labor - and with innovation.
Using Exchange Traded Funds to diversify is clearly one option to reduce risk. Use ETFs to gain limited exposure to growth by continent and type of industry.
http://www.incomeinvesthome.com/growth/TIPS/
Posted by: Richard Stooker | January 07, 2011 at 03:28 PM