iShares Emerging Markets Equity Index: August 2022 fund update

• 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 on the platform – this could help the fund track the FTSE Emerging 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

The iShares Emerging Markets Equity Index fund invests in a broad spread of companies based across emerging countries, including China, Taiwan, India and Hong Kong. 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-term investment outlook that can accept periods of high volatility.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a great, low-cost starting point for a portfolio aiming to deliver long-term growth. We think this fund could help diversify a more adventurous portfolio focused on global companies.

Manager

Mark Stephenson is a member of BlackRock's Index Equity team and co-leads the Emerging Market Pillar along with Manus Stapleton. Stephenson's service with the firm dates back to 1983, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. At BGI, he was a senior portfolio manager for Index Equity. Stapleton returned to Blackrock in 2021 having been a senior portfolio manager in indexed equity, index+ and commodities there for 11 years until 2012. Stephenson’s also worked at HSBC Halbis as co-lead of a long-short commodity strategy and as a senior indexed and ESG portfolio manager at Northern Trust Asset Management.

That said, every equity index fund at BlackRock has a primary, 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.

BlackRock’s global approach allows them to work closely with their teams across the world, helping drive more efficient management of their funds. We have positive conviction in the ability of BlackRock 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 over 1700 companies and is focused towards sectors such as financials, technology and consumer discretionary which make up 22.36%, 22.03% and 13.41% of the fund respectively.

This fund invests in most of the FTSE Emerging Index, which is known as partial replication. This should 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%, meaning it’s unlikely to have a significant impact on performance, and the team feels the cost of trading this stock currently 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, emerging markets status.

The fund also 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.

Since BlackRock’s lending program started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients.

Culture

BlackRock is currently the largest asset manager in the world, running $10 trillion globally as of January 2022. 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.

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.

ESG Integration

Blackrock was an early signatory to the Principles for Responsible Investment and has offered ESG-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies from its actively managed funds and require all fund managers to consider ESG risks.

As the iShares Emerging Markets Equity Index fund isn't an ESG-specific fund, there are no company exclusions applied like tobacco or weapons.

The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.

Cost

The fund has an ongoing annual fund charge of 0.19%. 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 iShares Emerging Markets Equity index fund has tracked the FTSE Emerging Index since it launched in December 2009, and the fund’s returned 79.47% versus the benchmark’s 94.63%*. As expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as close to the index as possible. Past performance is not a guide to the future.

The 10 biggest companies in the FTSE Emerging index currently make up 21.95% of the total index. How these companies perform will play a bigger part in the performance of the index and fund compared with some of the smaller holdings.

Over the last year, the FTSE Emerging index returned -4.41% to the end of July 2022. Utility companies were the best performing during the year with the sector growing 24.47%. However, the Utility sector only makes up around 3.49% of the total index.

As with many other countries across the globe, high inflation, monetary tightening, recession and the wider impacts of the war in Ukraine are being felt across emerging markets. China’s zero-COVID policy, and its broader regulatory crackdown, presents yet more uncertainty. Over the long term though there are expectations that energy prices should ease, which should reduce global pressures.

The five-year performance table below shows in some years the fund has tracked the index closer than others. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2022.

Find out more about iShares Emerging Markets Equity Index, including charges

View iShares Emerging Markets Equity Index Key Investor Information