PA ANALYSIS wealth managers emerging markets

So does this mean that emerging markets are the contrarian investment of the moment?

 

I would argue not.

 

To stem money pouring into their multi-billion pound funds, Aberdeen and First State either closed their funds or upped the initial charge. It worked as flows stopped. In fact it worked so well, that assets started to flow the other way with, for example, assets under management in Aberdeen Emerging Markets at £2.3bn (at the end of February, according to FE) when it had stood at north of £4bn not long beforehand.

Outflows may be slowing, but rather than this being a sign of stability as I have heard argued, it is more likely a sign of inertia, hope triumphing above experience, or the money remaining largely being mandated to be in emerging markets. Hugh Young is without doubt one of the best emerging market managers out there so why not keep it with Aberdeen AM?

 

The best-performing global emerging market equity fund over the past year is GAM Star Emerging Equity with a 0.9% return; the worst is Hexam Global Emerging Markets with -18.2%.

 

The spread in volatility over the same timeframe is from 20.1% (McInroy & Wood Emerging Markets) and 10.8% (Carmignac Emerging Discovery) so a very narrow spread indeed given there are 78 funds in the IMA GEM sector with different styles, managers, benchmarks etc.

Another example of emerging markets being out of favour is Neptune Asset Management’s Robin Geffen, a Russia and global emerging market fund expert, who has reportedly cut his allocation to emerging markets to a historic low in his Global Equity fund.

 

None of this particularly points to now being a sensible time to re-enter emerging markets. 

 

Looking down the line at regional emerging market opportunities, ASEAN countries have good fundamentals – they include nearly 10% of the world’s population (600 million people); the population is young and well educated with youth literacy rates above 95% in all but Cambodia and Laos; $435bn is scheduled to be spent on infrastructure by 2017; geographically it is well placed between China, India, Japan and Australia.

 

But there are still plenty of negatives.

 

Juliet Schooling-Latter, research director at Chelsea Financial Services, sums up the dilemma of Asia ex China, India and Japan investing saying: “With its excellent demographics, tremendous potential and growing international importance, those investors willing to accept the risk and volatility could consider the ASEAN region. It may well continue to suffer, along with other emerging markets in the short term, but I believe it is an exciting investment opportunity in the longer term.”

Barings Asset Management runs one of the few specialist ASEAN funds available as part of a wider emerging market stable. The firm’s head of UK wholesale distribution, Rod Aldridge, said that he is not seeing investors going back into emerging markets as wholeheartedly as some are arguing, adding that “when they do, they may be more selective”.

 

So what about the next level down and a country specific allocation?

 

Even here there are problems. When the chief executive of one of the world’s biggest Indian equity fund management firms says Indian equities “will have to be bought” and that one of his biggest problems at the moment is that “nobody is buying Indian equities unless they are mandated to” then you know he and his peers are pushing water uphill. 

 

If this is the bottom of its dip – which it may well be – the argument I have heard that this is a sign of stability for the asset class may stand up to scrutiny and now may be a great entry point. But – with the massive caveat that I am not licensed to give financial advice – I would doubt it.