Financial advisers always stress the importance of diversity – by geography, sector and risk. The Commonwealth certainly appears to meet just such criteria. It is a mix of deep and liquid markets like the UK, Australia and Canada, and less well developed states like Malawi and Uganda with India and South Africa somewhere in between.
Additionally, the Commonwealth has a plethora of tiny island states with very little in the way of investable companies.
It is surprising that there is no collective based on the Commonwealth although Peter Sleep, senior investment manager at Seven Investment Management (71M), cautions: “There will be quite a lot of resource companies in such a basket like Rio Tinto, Shell and BP in the UK, but any number of oil companies from Australia, Canada, South Africa and the African nations.”
If the UK is included in such an imaginary fund and based in the traditional way in terms of stock market value, it would skew the portfolio. Furthermore, most investors already have sufficient exposure in the UK.
In terms of population or an individual country’s economic potential, the results look less obvious. Singapore, for instance, with a six million population, has a very large and liquid stock market but Nigeria with 186m population is difficult to invest in directly and categorised as a ‘frontier’ market.
At 2.42bn, the Commonwealth is home to almost one-third of the world’s population whose member states cover one-fifth of the globe’s land. The way to access the most valuable countries which also show potential is through an active collective or an exchange traded fund, which is akin to an index tracker.
Often member states will feature in an emerging market or frontier fund, but then the investor will be taking on such countries as Brazil, China and Russia in the former category and Argentina, Romania and Vietnam in the latter.
Canada is a highly resource-based country with oil reserves second only to Saudi Arabia. Martin Payne, Leeds-based director of wealth managers Brewin Dolphin, suggests iShares MSCI Canada ETF to track its stock market. It has about 43 per cent in financial companies and 20 per cent in energy-related stocks.
The ETF is quoted in US currency and can be bought in London. For a single firm, he tips Middlefield Canadian Income, which is a £117m investment trust, aiming for high levels of dividend – currently 5.2 per cent – alongside longer term growth. Property, financials and energy predominate.
Among Commonwealth members, India offers “some of the most exciting long-term opportunities”, according to Jason Hollands of Tilney Investment Management. He likes its highly favourable demographic profile unlike China whose tumbling birth rate is already seeing a contracting workforce.
India is a young and growing nation with a median age of 27 years, compared to 40 in the UK. Many speak English, the language of international business. Since May 2014, the world’s largest democracy has become far more business friendly under Narendra Modi.
Hollands suggests investors access India through an Asian or global emerging markets fund like Stewart Investors Asia Pacific Leaders (with 29.1 per cent in India) or JP Morgan Emerging Markets Investment Trust (with 19.3 per cent weighting). For a specialist collective, Jupiter India is the market leader with a very strong record. Alquity Indian Subcontinent is less well-known but has the flexibility to include stocks from such markets as Bangladesh, Pakistan and Sri Lanka.
Nick Keenan, Barclays director of wealth management, notes both the success of moving more of the Indian population into becoming taxpayers and the Government’s injection of 2.1 trillion rupees into its state-owned banks to unclog credit. “With India’s long attractive growth prospects now on a more solid footing, we see Indian stocks as having further to travel in spite of already lofty valuations.”
Australia, as measured by GDP per capita, is the second wealthiest nation after Switzerland. Services account for over 70 per cent but the local stock market is narrowly focused with banks and other financial companies representing 41 per cent, led by the Commonwealth Bank of Australia.
Resources are still a major constituent and the country’s outlook partly depends on that growth with China the principal buyer. Payne says domestically – wage growth, consumer spending and house pricing – “appears to be a little soft but still positive”. He suggests iShares MSCI Australia ETF with 40 per cent in financials, followed by 18 per cent in materials. It can be bought in London in either sterling or US dollars.
Several Asian funds have large holdings in Australia, as well as tracker-based ones, like HSBC Pacific Index, with around 26 per cent exposure.
The cheap way into a New Zealand investment is the iShares MSCI version with a 0.49 per cent management fee. Unlike other markets, it is well diversified in terms of its top sector exposure with healthcare (19 per cent), utilities (16 per cent), industrials (13 per cent) and telecoms (12 per cent). Yet, as a warning, the index has only seven constituents.
South Africa could form part of a wider emerging market portfolio but Payne says it is probably best to opt for an ETF type of investment for specific and direct access. Based in US currency, the iShares MSCI South Africa ETF is largely in consumer discretionary (37 per cent) and financials (26 per cent).
He warns that Naspers, the global internet and entertainment group, accounts for 31 per cent of the index alone but does operate in 120 countries.
Hollands says that “the recent ejection of South Africa’s corrupt President Zuma gives cause for renewed hope. He gives HSBC South Africa ETF with 0.6 per cent ongoing costs and Fidelity Emerging Markets with 12 per cent in South Africa as two routes.
Singapore is favoured by several managers. Edinburgh Dragon has 31.6 per cent invested in the Commonwealth with a 14.8 per cent holding in Singapore. Aberdeen Asian Smaller Companies has 43.1 per cent overall with 12.9 per cent in Singapore and 14.8 per cent in Malaysia.
Outside single country funds, for multi-member Commonwealth exposure, consider:
Aberdeen Frontier Markets with Bangladesh, Ghana, Kenya, Nigeria, Pakistan, Sri Lanka
Geiger Counter with Australia, Canada, South Africa, Zambia
UIL (formerly Utilico Investments) with Australia and New Zealand.
Sleep says that when selecting funds, always check both that they are UCITS (Undertakings for the Collective Investment of Transferable Securities) for investor protection.
Leading investment trusts
Trust (Launch date) Common- 5-year growth
wealth per cent per cent
Aberdeen New India (2004) 99.5 95.7
JP Morgan Indian (1994) 97.9 91.7
India Capital Growth (2005) 97.3 156.6
Geiger Counter (2006) 89.8 -46.8
Middlefield Canadian Income (2006) 85.5 21.3
Aberdeen Frontier Markets (2007 53.0 34.6
Aberdeen Asian Income (2005) 52.7 20.8
City Natural Resources High Yield (2003) 50.1 -30.4
Pacific Assets (1985) 47.3 84.7
UIL (2004) 46.6 50.4
Source: Association of Investment Companies using Morningstar