iShares Emerging Markets Equity Index: October 2020 fund update

Kate Marshall | Tue 27 October 2020

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• BlackRock, a pioneer in index investing, has a great record of managing tracker funds
• We view this fund as a good option to get access to a broad spread of companies in emerging markets
• It’s one of the lowest-cost options for investing in these markets – this could help the fund track the index closely
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

This fund invests in a broad spread of companies based across emerging countries, including China, India, Brazil, South Africa and Taiwan. We think it's a convenient way to invest in the emerging markets, and could be used as a way to diversify a long-term, global investment portfolio. These markets are higher risk as they're at an earlier stage of development, so this fund should only be considered for a portfolio with a longer investment outlook that can accept periods of high volatility.

Manager

Kieran Doyle is a Senior Portfolio Manager in BlackRock's Institutional Index Equity Team. He's been part of the team since 2004 and named as this fund's manager since 2016. That said, every equity index fund at BlackRock has a primary (Doyle in this case), secondary and tertiary manager, who each have the ability to run the fund, along with the wider team. The wider team is well-resourced and experienced in index investing.

The group has investment managers and analysts based across the globe, helping drive more efficient management of their funds. We have conviction in their ability to provide simple and effective tracking options for investors.

Process

This fund aims to track the performance of the broader emerging stock market, as measured by the FTSE Emerging Index. It’s currently made up of around 1,500 companies across 27 different markets, and is focused towards sectors such as financials, technology and consumer-related businesses.

This fund invests in almost every company in the FTSE Emerging Index. This is known as partial replication, which could help the fund track the index closely without the cost of holding every stock. A proportion of this fund is also invested into smaller companies which are higher-risk than their larger counterparts. Companies that make up a very small part of the index are sometimes not held in the fund as they can be more difficult or expensive to buy and sell. For example, the fund doesn't currently invest in the only Pakistan-based company in the index – it only makes up around 0.01% of the index, meaning it’s unlikely to have a significant impact on performance, and the team feels the cost of trading this stock outweighs the potential benefits.

The makeup of the index has the potential to change over time, depending on which countries FTSE believes have reached, or lost, their emerging markets status. Recent additions include Romania in September 2020.

The fund has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is being run efficiently. The fund can also lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to keep costs lower.

Culture

BlackRock is the largest asset manager in the world, running $160bn of assets globally. The company was founded in 1988 by eight partners including current CEO Larry Fink and is known for both active and passive strategies across the world. Employees at BlackRock are encouraged to hold shares in the company so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

As one of the world's largest asset managers, and with lots of resource and knowledge under its belt, BlackRock aims to continue to drive further development in this part of the investment market. Being such a large player in the index tracking arena gives BlackRock unique access to the marketplace, which can help reduce trading costs.

Over recent years BlackRock has increased its drive towards stewardship and promoting ESG-based products. This involves direct dialogue with companies on governance issues that have a material impact on sustainable, long-term financial performance. While iShares Emerging Markets Equity Index isn't an ESG-specific fund, we view it positively that BlackRock as a group is taking an active approach to stewardship issues.

The team running this fund works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

Cost

The fund has an ongoing annual fund charge of 0.16%. This currently makes it one of the lowest-cost tracker funds in the Global Emerging Markets sector on the HL platform. We think this is excellent value for an emerging markets tracker option run by a provider we rate highly. Our platform charge of up to 0.45% per annum also applies.

Performance

The fund has done a good job in tracking its benchmark, the FTSE Emerging index since launch in 2009*. As is typical of index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. However this difference has been reduced due to the strategies used by the BlackRock team.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees how it will perform.

A glance at the five-year performance table below shows in some years the fund has tracked the index closer than others. On occasion it has even ended up slightly ahead of the index due to the strategies used by the team, although this won't necessarily happen in future and isn’t an aim of the fund. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 30/09/2020.

More on iShares Emerging Markets Equity Index, including charges

iShares Emerging Markets Equity Index key Investor Information