By Ian Cowie

20 December 20 2010

Financial advisers fear a crash could come soon as income-seeking investors flood into emerging market bond funds, despite warnings from the Bank of England that this may be a bubble about burst. Unit trusts investing in Brazil, Russia, India and China, sometimes called the BRIC countries, and other high growth economies are attracting record inflows, according to the Investment Management Association .

Emerging market bond funds - investing in IOUs issued by BRIC governments and large companies - offer higher yields than equity or share-based emerging market funds. While Bank of England base rate remain frozen at 0.5 per cent and the yield on the FTSE 100 index of Britain's biggest companies shares hovers around 3 per cent, some emerging market bond funds yield 6 per cent.

Only four unit trusts have a five year track record in this sector - those run by Threadneedle, M&G, Schroder and Invesco - but they have all delivered total returns of more than 50 per cent over the period, compared to less than 23 per cent from the FTSE 100. But the past is not a guide to the future and these funds do not guarantee investors' income or capital.

The Bank of England highlighted five keys risks facing the British economy in its latest bi-annual Financial Stability Report . It said these included investors seeking better returns than they can get on deposit by investing in emerging markets. The Bank explained that too much capital flowing into these economies could lead to unsustainable bubbles which could destroy investors' capital if they burst.

Leading independent financial advisers (IFAs) agree: ……

……Alan Steel of IFAs Alan Steel Asset Management also urged a cautious approach: "Many emerging markets are in entrenched bull markets with very strong well balanced economies but the highest returns are probably behind us.

"At this stage we would prefer a safe pair of hands who has a wider mandate so can switch to other mispriced bonds when emerging market bonds become overbought. It makes sense to leave such decisions to experienced experts like Michael Hasenstab at Franklin Templeton Total Return Global Bond Fund , whose current holdings show heavy exposure to Korea, Australia , Malaysia, Norway, Poland, Argentina. He is also long on the US dollar and short on the euro - two great contrarian calls."

Quote courtesy of The Telegraph online
Monday 20 December 2010