The principal reasons for this switch in sentiment – a suspicion that a number of emerging economies were beginning to overheat, and a belief that the nascent Western recovery would aid developed market equities – have been well documented.
There is little sign yet that EM concerns have been fully put to bed, despite the tightening policies that have come to the fore in 2011; indeed, some suggest the market has continued to underestimate just how severe the remedies will have to be.
But renewed doubts over the ongoing strength of growth rates and corporate earnings elsewhere may have left investors wondering where to turn next.
Emerging market debt, similarly, has had a tougher time of it this year as spreads over US Treasuries tighten and inflation fears make their mark. Most managers in the sector are now looking to local currency denominated debt for outperformance, in the expectations of forex appreciation. EMD has, admittedly, delivered a slight positive return thus far in 2011.
But though the number of emerging market debt funds aimed at retail investors expanded significantly last year, there is a sense that UK retail investors have not yet fully bought into the concept. “They do not realise how much asset classes have changed”, said Brett Diment, head of EMD at Aberdeen AM, last month.
New offerings
That spate of EM equity and bond fund launches has begun to ease off this year – understandable, given the concerns outlined above. Recent product unveilings, however, suggest more houses are looking to combine EM equity and fixed income offerings as the quest for returns becomes more complicated.
The most recent high profile move was from Franklin Templeton, which has launched an emerging markets balanced fund that will be lead managed by Mark Mobius and Michael Hasenstab.
“We can take advantage of equity opportunities, currency, local interest rates, sovereign credit, and corporate credit, encompassing the broadest exposure to emerging markets,” said Hasenstab.
Franklin Templeton is not alone: Pimco announced an EM multi-asset strategy in April, investing across local and hard currency emerging market debt as well as equities and currencies. Lead manager Curtis Mewbourne suggested at the time that many investors “don’t know how much they should invest” in each particular asset class.
Another Allianz subsidiary, RCM, is also planning to launch an emerging markets multi-asset fund this year; it sees such offerings as helping limit the impact of GEM equity volatility.
Combining strategies
Not yet added to this trio, but worthy of note nonetheless, is the BNY Mellon AM Total Emerging Markets Strategy. Launched in the US in February, the strategy combines equity selections made by BNY Mellon subsidiary The Boston Company Asset Management with fixed income and currency allocations from fellow BNYM subsidiary Standish Mellon AM.
It is worth noting the scope required for such offerings: BNY Mellon’s independent subsidiary model seems well suited, but there aren’t too many fund houses with the necessary EM debt and equity capabilities. Even Pimco is only just starting to build out the equities side of its business.
BNY Mellon says it currently has no firm plans to launch the Total EM Strategy in the UK at the moment; any such move will undoubtedly depend on its performance and UK investors’ appetite. IFAs have been emphasising the importance of further asset class diversification in recent months, but it remains to be seen just how asset allocators adapt to an environment where emerging market returns prove harder to come by across the spectrum.
