Emerging Issues (Part 2)

So, emerging markets are risky. We already knew that. But since they’re going to be the locus of growth for a while, how should we invest?

Certainly direct investing in emerging market companies is possible. Many of these are listed in the US via American Depository Receipts, or ADRs. These allow foreign companies to list their shares on a US exchange. And if you had purchased Infosys, the giant Indian information systems outsourcer back when they listed in 1999, you’d have grown your money 10-fold by now.

But for every Infosys out there, there’s a Satyam or Sino-Forest, beset by fraud and mismanagement. Direct investment in emerging companies is a challenge. So many folks do the next best thing—they own an index, or basket of stocks. This diversifies your holdings among hundreds of companies, and ETFs are an efficient way to accomplish this. It’s what we do for a small portion of many portfolios.

But another way to invest in emerging markets is to buy shares of domestic companies that do business over there. Proctor and Gamble gets 15% of its revenues from China; Bayer sells 20% of its drugs to Latin America and Africa. These global companies often invest in local distributors to get a local presence, and manage them consistent with their own corporate culture.

That way you get US accounting, professional management, and emerging market growth. Not a bad way to explore the world.

Douglas R. Tengdin, CFA
Chief Investment Officer
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