Bias in global index may limit prospects

Investors should be wary of funds that are too closely linked to the global index as the current regional allocations and sector mix that constitutes the index may lead to missed opportunities and risk.

According to the chairman of Merrill Lynch Investment Managers’ (MLIM) asset allocation committee, David Hudson, following the Morgan Stanley Capital Index (MSCI) is “not the way to invest at the moment”.

He said the global index had a clear bias to developed markets, which meant opportunities in emerging markets, particularly the BRIC countries — Brazil, Russia, India and China — may be missed if the index is too narrowly followed.

The MSCI allocation to the North American region currently stands at around 56 per cent.

Japan accounts for 11.9 per cent of the index’s allocation, while the United Kingdom has an 11.1 per cent allocation and the rest of Europe accounts for a further 19.7 per cent.

Only 1.2 per cent of the index is weighted to the Asia Pacific region excluding Japan.

Hudson said while emerging markets were more open to increased geo-political risk than the developed markets, factors such as improved corporate governance and strong world commodity prices along with population growth and the rapid urbanisation of populations in the emerging markets made them increasingly attractive areas for investment.

He said sector bias was also inherent in the MSCI with a “significant” 24.5 per cent allocation to financials, but relatively little exposure to materials and energy at 5.2 per cent and 9.3 per cent respectively.

Hudson said this sector bias neglected opportunities arising from global demand for commodities and the accompanying price increases that have been driven by development in the emerging market economies.