In the past 12 months performance across most asset classes, including emerging markets, has retreated in the face of a credit crunch and US economic slowdown. Despite this, emerging market economies are still growing faster than most developed countries.

S&P categorises an emerging market as a country having a low or middle income economy as defined by the World Bank. In addition, the country's investable market capitalization must be low relative to its most recent GDP figures and its equity market must exhibit substantial features of emerging markets.

Many emerging markets have recently opened their economies up to external financial investment and are in the process of developing more sophisticated capital market systems and robust regulatory environments. As a result they are considered to be a high risk, potentially high growth investment which can complement a well balanced portfolio.

S&P's 'Global Emerging Markets Sector Update' (April 08) discussed how managers view the outlook for emerging markets equities agreeing that the market volatility would be expected to continue in the short term and rejecting the theory of decoupling - that emerging markets would not be affected by US economic slowdown. There was however a general agreement by fund managers that the sector would be less affected now than it has been in the past, to problems in the developed world, due to growing inter-emerging markets trade and investment, increased private consumption and strong investment in infrastructure.

The below table compares the income and growth returns of emerging market funds available to Australian investors which has been compiled by Vanguard using Morningstar data. It shows 10 emerging market funds returns tracking 3, 5 and 10 year performance.

Source: Morningstar subscription data
Performance as at 30/06/2008 is net of fees. Assumes 100% reinvestment of distributions.

When markets become volatile one thing that tends to be overlooked is the after-tax impact of fund manager investment approaches. The income component of return includes dividends, short-term and long-term capital gains. Higher income returns typically indicate high turnover due to the realisation of more capital gains in the portfolio at the expense of growth returns. For investors chasing higher income returns, such as a retiree, who may not have to worry about tax, a high income return is good. However for most tax paying investors a high income return will result in a higher tax bill.

By keeping the turnover low in the portfolio, the income component of the return can be kept low and so be more tax-efficient for the investor. A key benefit of Vanguard's indexing approach is low portfolio turnover resulting in low income returns- our approach typically aims for a return split of 1/3 income to 2/3 growth.

You can also see from this data that, on average, Vanguard's emerging markets index fund has performed consistently well and is one of the longest established funds in the market with a ten-year track record.

Fast Facts on the Vanguard® Emerging Markets Index Fund
Vanguard's Emerging Markets Shares Index Fund provides a lower risk and low cost way to gain exposure to a diversified range of developing markets. The fund invests in around 600 companies from more than 20 countries across Asia, Latin America, Europe, Africa and the Middle East so it is highly diversified. Vanguard's optimised indexing approach minimises trading costs and takes advantage of inefficiencies in benchmark changes providing opportunities to add value.

Fund Objectives
The fund aims to match the total return of the MSCI Emerging Markets ex-Columbia and Pakistan Index (with net dividends reinvested) before taking into account fund fees and expenses.

Fund Rating
Standard & Poors - 4 Star

Benefits for your Clients
Diversification - the fund invests in around 600 listed on the exchanges of 20 developing markets providing the potential for long-term capital growth

Access investment opportunities not available in Australia - the fund provides access to some of the world's fastest-growing markets access industries and companies under or not represented in Australia

Low fees - low management costs (around half the industry median)

Flexibility - you can easily switch funds with no costs other than usual buy/sell spreads and the fund has no minimum additional investment requirements mean you can add to your investment as much and as often as you like

Platform Access
This fund is available on the following platforms:
ASGARD
Avanteos
BT Wrap
IOOF
Macquarie Wrap
Masterkey
Oasis
Summit

Fees
Application/contribution fee - Nil
Withdrawal fee - Nil
Switching fee - Nil
Buy/Sell spreads - +0.75/1.00
Management costs - 0.56% p.a.

Fund Size
The total fund growth since inception in 1998 as at 30 June 2008 was $414.5m