October 2010
Financial-Planning.com
THEPortfolio
Where the Growth Is
Emerging Asia is now the home to almost half the world’s people and is the engine
of global growth. What’s your allocation? By Margie Carpenter
Advisors who follow a typical,
traditional (heavily domestic) asset allocation
model are likely to be surprisingly underweight
in the highest-growth economies of the world.
Equity investment opportunities in emerging
Asian markets stand out for three things:
• High projected growth for the foresee-
able future. According to separate analyses by
JP Morgan and Bespoke Investments, emerging
markets’ GDPs are projected to grow at annual
rates of 6.7% in 2010 and 5.8% in 2011—
more than twice the projected rate of developed
markets (2.7% annually). Analysts at Matthews
International are projecting that emerging Asia
will account for 60% of the world’s total eco-
nomic growth over the next five years. In fact,
China’s GDP outpaced Japan’s in the second
quarter of 2010, making it the world’s second
largest economy.
• Stunning, yet highly volatile perfor-
mance over the last several years. The MSCI
EM Asia index gained 38% in 2007, lost 54%
in 2008 and gained 70% in 2009. Yet this
region largely bypassed the huge debt run-
up that plagued most of Europe and North
America over the past decade. Through June
30, 2010, the MSCI EM Asia index returned
-4.9%.
• Confusion about how to participate
in the growth of this region and perhaps
mitigate volatility. Emerging Asia now
makes up 21% of the world’s $49.2 trillion
market capitalization, compared with just
5% back in 2000. What’s more, this region
is home to almost half the world’s popula-
tion, and it is urbanizing at speeds
the United States can only begin
to imagine.
WHAT’S EMERGING?
The term “emerging markets” was
coined in 1981 (almost 30 years
ago) by Antoine van Agtmael, then
an investment officer with Inter-
national Finance Corp. Today, the
term is still used to identify econo-
mies with different levels of emer-
gence, ranging from South Korea
and Taiwan—which many would
argue are fully developed—to Viet-
nam and Malaysia. Perhaps we still
use the term because nothing better
has been found to replace it. This doesn’t mean as our mind-set being cemented in the broader
that the term isn’t antiquated, however. term “emerging markets.”
The most popular indexes cover some We can clear up some of the confusion by
emerging Asian economies, but not exclusively. updating our international allocation process.
For instance, the MSCI Emerging Markets Consider, for example, client equity port-
Index of 22 countries mixes China, India, Indo- folios that have a relatively high, 35%, inter-
nesia, Korea, Malaysia, the Philippines, Taiwan national exposure—subdivided as 20% in
and Thailand with Brazil, Chile, Columbia, developed international and 15% in emerg-
the Czech Republic, Egypt, Hungary, Israel, ing markets. Using the broader MSCI indexes
Mexico, Morocco, Peru, Poland, Russia, South as our benchmark, emerging Asia—with
Africa and Turkey. The MSCI EM Far East 21% of the world’s market capitalization,
index includes only seven countries: China, half the world’s population and growth rates
Indonesia, Korea, Malaysia, Philippines, Tai- double that of the United States and other
wan and Thailand—leaving out India. The developed markets—would make up only
MSCI EM Asia does include all eight, but is not 7% of the portfolio. Advisors with smaller
used as one of the “key” benchmarks for most international allocations or smaller emerging
portfolios today, probably because of the lim- allocations within the international framework
ited number of products that mirror it, as well could easily have less than 5% in these markets.
THEPortfolio
BIGGER bubbles
In 2009, China/Hong Kong accounted for 13% of the world’s global market
capitalization, up from 2% 10 years earlier.
1999
Other Asia
5%
Japan
U.S./Canada 13%
49%
India
0%
Latin
America
2%
Mid East/
Africa
1%
Europe
28% China/
Hong
Kong
2%
Global market capitalization: $35 trillion
Source: Matthews International
Even this is higher than the typi-
cal pension fund; according to pension
consultant InterSec Research, U.S. pen-
sion plans, in aggregate, currently have
committed less than 1% of their total
investments to emerging markets—and,
of course, proportionally less to emerging
Asian economies.
BUILDING A STRATEGY
How do you resolve these issues? The
first step is to look at your own client
portfolios and determine how much
exposure your current asset mix provides
to emerging Asia economies. Be careful
to look beyond just the emerging mar-
ket-type vehicles; many actively managed
funds in the developed international area
have been investing in emerging markets
as well, some quite substantially. Do you
have the allocation you intended?
A bigger question, and a very impor-
tant one, is this: How are you determin-
ing your allocation to emerging markets,
and to Asia in particular? What do you
use as your “neutral reference point”?
2009
U.S./Canada
35%
Other Asia
13%
Europe
25% Japan
7%
China/Hong Kong
13%
Latin America 5% India 3%
Mid East/Africa 3%
Global market capitalization: $47 trillion
Should you use total global market capi-
talization, GDP growth, population fig-
ures or some combination of the above?
In our investment management process,
we use current market cap as our neu-
tral reference point and then we review
the other metrics as an overlay, including
individual clients’ risk tolerance. Clearly,
however, risk tolerance notwithstanding,
these trends all point to a higher weight-
ing in emerging Asian markets.
Some advisors argue that they offer
investment exposure to these regions by
investing in U.S.-based multinational
firms with significant revenues from
international activities, and this may be
true to some extent. The other side of
this argument is that the business envi-
ronment in Asian markets is becoming
more conducive to entrepreneurialism
and local business development, thereby
supporting the continued growth of their
own domestic capital markets.
Once you determine a more targeted
exposure to Asia, other questions come
to mind. Which funds provide pure
Asian exposure? What is the total Asian
exposure if you couple a pure Asian fund
with a more diversified emerging markets
fund?
A proliferation of new products
allows us to invest in these regions like
never before. Which of them provides
the best or most informed exposure to
a volatile asset class? Is it better to use a
broad Asian fund to raise your overall
Asian exposure, or could you couple a
broad fund with specific country funds
for additional, more targeted exposure?
Is an actively managed portfolio likely to
be superior to a passively managed one in
a corner of the markets that experiences
periodic civil unrest, changes in invest-
ing culture (and flirtations with commu-
nism) and other political and social risks
not normally encountered in the devel-
oped nations of the world?
Answering these questions can
be challenging and time consuming.
Morningstar currently lists 123 distinct
mutual funds and 34 ETFs in its diver-
sified emerging markets category, which
has an aggregate Asian exposure of just
30%. A total of 56 funds and 38 ETFs
invest in Pacific/Asia ex-Japan, which
gets you closer to the target. But again,
you’re mixing developed with emerg-
ing market coverage, often somewhat
unpredictably in the actively managed
funds. (Among these funds, the typical
ratio of developed to emerging markets
exposure is 47%/53%.) Using several
different indexes can be equally counter-
productive; funds that mirror the MSCI
EAFE and diversified Asia/Pacific funds
both deliver broad exposure to Japan,
which is certainly overkill for the advi-
sor who specifically wants more emerg-
ing Asia in his or her overall asset mix.
In my own research conducted using
Morningstar’s ETF database, I found just
two ETFs that had reasonable exposure
to the eight countries found in the MSCI
EM ASIA index: the iShares MSCI All
Country Asia ex-Japan (AAXJ) and
the SPDR S&P Emerging Asia Pacific
(GMF). Of course, there are many
single-country funds, mostly investing
in China and India, and while these are
critical countries, they don’t capture the
whole region.

Nor are long-term track records easy
to come by. The first true emerging
markets fund, Templeton Developing
Markets, was launched in 1991; no other
fund in this broad emerging markets
category has a track record going back
before 1994. In terms of assets, the very
largest emerging markets investment
fund today wasn’t even around six years
ago: the Vanguard Emerging Markets
ETF, with $39 billion under manage-
ment, debuted in March 2005.
With all of the new products in exis-
tence, many are gimmicky or “me too”
funds, which have low asset bases and
therefore may close. Avoid them. There
Tiny economies are becoming significant members of the
the global opportunity set, even if U.S.-centric portfolios
refuse to see it.
are actually very few that are worthy of
a second look. Characteristics that seem
critical in this asset category are history of
investing in the region, manager tenure
and resources committed to the region.
One firm that has done a fine job in all of
these areas is the Matthews Funds, but it
is not alone.
What about index funds? While some
may satisfy the need for specific exposure,
there is still danger in blindly investing in
these faraway regions.
Volatility in this category cannot go
unmentioned. The three-year average
standard deviation for Pacific/Asia ex-
Japan funds, for both mutual funds and
ETFs, is a whopping 35. However, recall
that this category includes the single-
country funds, which pull the category
volatility averages way up. Some of the
more aggressive China-only funds have
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standard deviations over 40. Diversified
Pacific/Asia ex-Japan funds sport three-
year standard deviations in the 20–30
range, not so far from the S&P 500’s
standard deviation of 20.
a fresh look
As advisors begin to examine these issues
closely, it will become clear that some-
thing profound is taking place in the
more sophisticated corners of the invest-
ing community. The way we look at the
world, and how we invest in the world’s
economies, is likely to change in the years
ahead. At a minimum, some smart advi-
sors will dispose of the old “developed
versus emerging” approach and look
at other methods of evaluating global
investment opportunity, possibly via a
regional and country approach.
Look at the chart, “Bigger Bubbles,”
on page 122. You will notice that there
is no distinction made between emerg-
ing and developed markets in these
charts. This is a sign of how we may
look at global markets in the future.
Why not start now?
One hundred years ago, the United
States was an emerging market itself.
Today it is a mature economy. As other
regions and countries take over as the
growth engines of the world, advisors will
need to continue to explore and become
more comfortable with higher allocations
to these higher-growth regions. Unfor-
tunately, due to inconsistencies in the
indexes and fund categories, the coming
years will continue to be challenging in
determining how to use existing funds to
gain precise exposure to specific emerg-
ing economies. As advisors become more
versed in economies that are not rou-
tinely covered on the U.S. evening news,
they may begin to recognize investment
opportunities in other categories, such as
Asian real estate and frontier markets.
The bigger picture here is that tradi-
tional investment allocations, the indexes
that serve as a proxy for global exposure
and the categories of funds we use for
analysis have not taken into account the
rapid growth in China, India and other
emerging Asian markets—and the size of
those markets compared with 10 or 20
years ago. Tiny economies are becoming
significant members of the global oppor-
tunity set, even if they remain tiny parts
of most U.S.-centric investment portfo-
lios.
The adjustment may be messy, and
the options are difficult to evaluate. But
financial advisors who give their clients
a chance to participate in the high-
est-growth economies of the world,
in appropriate exposures, will be add-
ing value—and, potentially, long-term
returns as well. FP
Margie Carpenter, CFP, CIMA, is founder
of Bell Tower Advisors in Chagrin Falls,
Ohio. Her research report, Best Ways to
Invest in Emerging Markets, Particularly
Asia, is available for purchase at www.bob-
veres.com.
Bell Tower Advisors is boutique, fee-only financial advisory and investment research firm. We are proud to identify
the following characteristics as key drivers of our business philosophy:
• We are independent. We are not affiliated with any bank, brokerage, or insurance company, so our
advice is unbiased, objective and is provided in the best interest of our clients.
• We are fee-only. We receive no commissions, kickbacks or referral fees from any entity, thereby
retaining our unbiased approach.
• We act as fiduciaries on behalf of our clients. As a Registered Investment Advisor, we have a legal
obligation to put our clients’ interests ahead of our own, unlike brokers and other affiliated agents.
We provide comprehensive and continuous investment advice, which also differs from the transactional
mindset of brokers.
• We serve women only because many women have unique communication and learning styles as well as
unique experiences with finances and investments.

For more information, please contact:

Margie Carpenter, CFP®, CIMA®
Bell Tower Advisors
272 Bell Street
Chagrin Falls, OH 44022
(440) 318-1988
margie@belltowerllc.com
www.belltowerllc.com

Margie Carpenter has over 20 years in the financial services industry, including 15 in the fee-only financial
advisory profession. In March, 2010, she launched Bell Tower Advisors, a financial advisory and independent
research firm. Prior to this venture, she was responsible for managing investment portfolios for a large, Cleveland-based
advisory practice (her total AUM was over $150 million) and worked directly with high net worth clients whose assets
ranged from $1 million to over $15 million. She has also conducted numerous investment research projects, analyzing
asset classes and the fund/ETF universe to find the optimal approach to these asset classes. Her work has been
published in the Journal of Financial Planning and Financial Planning Magazine. Margie holds the CFP® and CIMA®
designations, and has a BA from Bates College and an MBA from Emory University.

Past performance is no guarantee of future performance, and investment results and principal value will fluctuate. The risks of
investing in the global capital markets, particularly emerging markets, are extremely high and should be approached with caution.
Information presented is believed to be factual and up-to-date, and all expressions of opinion reflect the judgement of the author as
of the date of publication and are subject to change.