Advisors who follows a typical, traditional (heavily domestic) asset allocation model are likely to be surprisingly underweight in the highest-growth economies of the world. Equity investment opportunities in emerging Asian markets stand out for three things:

* High projected growth for the foreseeable future. According to separate analyses by JP Morgan and Bespoke Investments, emerging markets' GDPs are projected to grow at annual rates of 6.7% in 2010 and 5.8% in 2011-more than twice the projected rate of developed markets (2.7% annually). Analysts at Matthews International are projecting that emerging Asia will account for 60% of the world's total economic growth over the next five years. In fact, China's GDP outpaced Japan's in the second quarter of 2010, making it the world's second largest economy.

* Stunning, yet highly volatile performance over the last several years. The MSCI EM Asia index gained 38% in 2007, lost 54% in 2008 and gained 70% in 2009. Yet this region largely bypassed the huge debt run-up that plagued most of Europe and North America over the past decade. Through June 30, 2010, the MSCI EM Asia index returned -4.9%.

* Confusion about how to participate in the growth of this region and perhaps mitigate volatility. Emerging Asia now makes up 21% of the world's $49.2 trillion market capitalization, compared with just 5% back in 2000. What's more, this region is home to almost half the world's population, and it is urbanizing at speeds the United States can only begin to imagine.

WHAT'S EMERGING?

The term "emerging markets" was coined in 1981 (almost 30 years ago) by Antoine van Agtmael, then an investment officer with International Finance Corp. Today, the term is still used to identify economies with different levels of emergence, ranging from South Korea and Taiwan-which many would argue are fully developed-to Vietnam and Malaysia. Perhaps we still use the term because nothing better has been found to replace it. This doesn't mean that the term isn't antiquated, however.

The most popular indexes cover some emerging Asian economies, but not exclusively. For instance, the MSCI Emerging Markets Index of 22 countries mixes China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand with Brazil, Chile, Columbia, the Czech Republic, Egypt, Hungary, Israel, Mexico, Morocco, Peru, Poland, Russia, South Africa and Turkey. The MSCI EM Far East index includes only seven countries: China, Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand-leaving out India. The MSCI EM Asia does include all eight, but is not used as one of the "key" benchmarks for most portfolios today, probably because of the limited number of products that mirror it, as well as our mind-set being cemented in the broader term "emerging markets."

We can clear up some of the confusion by updating our international allocation process. Consider, for example, client equity portfolios that have a relatively high, 35%, international exposure-subdivided as 20% in developed international and 15% in emerging markets. Using the broader MSCI indexes as our benchmark, emerging Asia-with 21% of the world's market capitalization, half the world's population and growth rates double that of the United States and other developed markets-would make up only 7% of the portfolio. Advisors with smaller international allocations or smaller emerging allocations within the international framework could easily have less than 5% in these markets.

Even this is higher than the typical pension fund; according to pension consultant InterSec Research, U.S. pension plans, in aggregate, currently have committed less than 1% of their total investments to emerging markets-and, of course, proportionally less to emerging Asian economies.

BUILDING A STRATEGY

How do you resolve these issues? The first step is to look at your own client portfolios and determine how much exposure your current asset mix provides to emerging Asia economies. Be careful to look beyond just the emerging market-type vehicles; many actively managed funds in the developed international area have been investing in emerging markets as well, some quite substantially. Do you have the allocation you intended?

A bigger question, and a very important one, is this: How are you determining your allocation to emerging markets, and to Asia in particular? What do you use as your "neutral reference point"? Should you use total global market capitalization, GDP growth, population figures or some combination of the above? In our investment management process, we use current market cap as our neutral reference point and then we review the other metrics as an overlay, including individual clients' risk tolerance. Clearly, however, risk tolerance notwithstanding, these trends all point to a higher weighting in emerging Asian markets.

Some advisors argue that they offer investment exposure to these regions by investing in U.S.-based multinational firms with significant revenues from international activities, and this may be true to some extent. The other side of this argument is that the business environment in Asian markets is becoming more conducive to entrepreneurialism and local business development, thereby supporting the continued growth of their own domestic capital markets.