FUNDS that buy into emerging markets are moving onto many investors’ radar screens after performing strongly over the past year. Seven of the top ten performing funds in that time were in that sector, with Threadneedle Latin American Growth leading the pack.

Rob Harley at Bestinvest, an independent adviser, said: “Over the past few years emerging countries have been able to rebuild their balance sheets, which means many are financially stronger than ever. Brazil and Russia have benefited from rising commodity prices, outsourcing has boosted India, and China has become the manufacturing hub of the world.”

Emerging-market funds have always been classed as high-risk investments but some analysts now believe emerging states are becoming less volatile.

Jonathan Asante at First State Investments, a fund manager, said: “In general, the economies of emerging-market states are better run than they were 10 years ago, which has made them more stable.”

Many countries have also seen the emergence of domestic investment, and increasing wealth among their own populations means they are becoming less dependent on foreign investment. They are not by any means self-sufficient — China is one of the world’s biggest importers — but the emergence of a middle class is generating growing internal demand for goods such as cars, mobile phones and televisions.

Justin Urquhart Stewart at Seven Investment Management, a wealth manager, said: “We are seeing influences that we have never seen before. In Malaysia and India, for example, there are now domestic pension schemes — the growth of domestic investment has provided stability. We are also seeing the expansion of consumer spending. In Jakarta, Indonesia, there were only seven shopping malls 10 years ago. There are now 72 and it is not tourists that they are packed with, but domestic consumers.”

As countries become more developed, their economic and political volatility decreases. Elena Shaftan, manager of Jupiter Emerging European Opportunities, said: “Eastern Europe has definitely become less risky and is now more of a developed market. The risks associated with it are very much the same as western Europe. Russia, however, is still very much an emerging market and has the potential to be volatile.”

In addition to the macroeconomic factors, micro factors have also helped emerging- market economies. Devan Kaloo at Aberdeen Asset Management said: “The quality of the companies has improved significantly in many countries. Accounting standards and transparency are better than before. Firms realise they have to look after their shareholders and balance sheets are looking stronger. Generally therefore, the risk of investing has decreased. But this does vary. In South Africa and India the regulators are doing a good job, but this is less true in Argentina and Russia.”

However, while emerging markets are enjoying their fifth year of outperformance against the developed world, Dean Newman, manager of Invesco Perpetual’s Latin American fund, said: “With so much new money coming into emerging markets you have to be careful. Last week, for the first time, I detected concerns about the impact of the high oil price from analysts in South Africa and Turkey.”

Philippa Gee at Torquil Clark, an adviser, believes emerging markets can reduce the risk and volatility of your portfolio, however. She said: “The US, UK and European markets tend to move together, but emerging economies are not as closely correlated.”

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