"The risk lies not in owning emerging markets but in not having enough exposure to them"

Warning from Bryan Collings, manager of the Ignis HEXAM Global Emerging Markets Fund

It is more important than ever for investors to have sufficient exposure to the growth potential of emerging markets.

Over the ten years to the end of April, the MSCI Emerging Markets Index outperformed the FTSE 100 Index by nearly 180%.

For investors with a medium to long-term investment horizon it is this longer-term trend, based on fundamentals, that is significant not the short-term fluctuations that often cloud investors' judgement.

Given the headwinds currently being faced by developed markets, HEXAM believes that the risk lies not in owning emerging markets, as is the prevailing myth, but in not having enough emerging market exposure.

Short-term volatility doesn't equal risk While emerging markets tend to demonstrate higher levels of short-term price volatility this does not mean they are more risky.

"People view emerging markets as hugely volatile relative to developed markets and shy away from this perceived risk," says Bryan Collings, whose Ignis International HEXAM Global Emerging Markets Fund has risen 26.7% in the first four months of 2009, outperforming a 14.4% rise in the MSCI Emerging Markets Index and a 4.7% fall in the MSCI World Index.

"But short-term volatility is more a function of portfolio flows from short-term foreign investors and speculators than an indication of fundamental risks.

What's more, relative volatility within emerging markets has actually been trending lower for years, including during this latest crisis.

As the chart below shows, volatility in emerging markets has consistently remained within a narrower range than both the FTSE All Share and the SandP 500 indices.

In the recent crisis, emerging markets' volatility peaked at a significantly lower level than developed markets' volatility and dissipated more quickly.

Six-month rolling volatility Source: Bloomberg Misconceptions surrounding emerging markets are compounded by the huge disparity in investors' knowledge of developed versus emerging markets, especially among UK investors.

This creates a false comfort with UK equities and an unwarranted scepticism about emerging markets.

"The 'cost' of acquiring sufficient knowledge about emerging markets is high and this precludes optimum portfolio allocation," explains Collings.

"The majority of UK and US investors have approximately 5% exposure to emerging markets within their portfolios.

It makes no sense to have so low an allocation to such a large and important asset class.

Representing approximately 94% of the world's land mass, housing 80% of the global population and providing 90% of oil and gas reserves, global emerging markets are too big to ignore".

""Investors have long known that the safest place to invest for the long term is where the savings are," says Collings.

"With 75% of foreign exchange reserves in emerging markets, if you're not already invested in the growth potential of the emerging markets asset class, you should be.

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