This is a difficult part of the world to access because most of the stocks from these countries don't trade in U.S. markets and they don't get much weighting in emerging market or frontier market funds.
The largest country weighting in the fund is Kazakhstan at 46%, followed by Russia and Mongolia at 14%, Turkmenistan 6%, Kyrgyz Republic 5%; even Tajikistan has a 1% weight. There are also 5% weightings in the UK, Canada and Sweden for companies operating in Central Asia but listed on foreign markets.
This part of the world is resource-rich and the sector allocation of the fund reflects this. Basic materials comprise 43% of AZIA and energy another 37%. Financials and telecom are both weighted at 9%.
Other commentaries about this fund might be critical of the sector concentration but I think it makes working the fund into a diversified portfolio easier to do. AZIA is a proxy for natural resources. A large part of the decision to buy this fund boils down to the investor's outlook for commodity prices. The companies in the fund and the countries targeted rely heavily on commodity prices and the demand for commodities.
There are important things to follow with owning this fund, though, and one is the political stability of the larger countries in the fund. Kazakhstan has historically had issues with corruption and Mongolia has threatened Bolivia-like nationalization of certain mines. This isn't really analyzable for most people so much as something to follow and reason to sell into any news that you think diminishes the prospects of the fund.
The other big risk factor to the fund is the extent to which these countries rely on selling resources to China. Global X has a brief research piece to support the fund that focuses on Chinese increasing demand for various resources.
According to the report, total trade between China and the countries in the fund grew from $500 million in 1992 to $30 billion in 2010. Perceptions of Chinese slowing could negatively affect AZIA.
I have referred to countries like these on my blog as having stuff in the ground the world needs that will make them more important investment destinations. "More important" means potentially very lucrative if the respective governments can avoid doing truly stupid things.
While the potential for returns is great, so, too, is the potential for volatility. Investors will want to keep close tabs on news affecting the region and price movements of the constituent holdings.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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