Some U.S. institutional investors still believe in emerging markets, while others refer to them as the "submerging" markets. Some pension funds fired emerging markets money managers, often reinvesting at lower levels. Other funds, endowments and asset managers dove into the troubled waters, investing to meet long-term asset allocations.
Not all U.S. institutional investors are shying away from emerging markets after a disastrous third quarter.
Some pension funds fired emerging markets managers and reinvested in the beleaguered asset class at lower levels.
Other funds, endowments and asset managers decided to invest during the troubled summer months. Some investors still believe in the asset class that others have dubbed the "submerging" markets and invested to meet long-term asset allocations.
The returns, however, were ugly. The Morgan Stanley Capital International Emerging Markets Free index was hard hit in the third quarter, losing about 24% of its value from July 1 to September 30. For the year as of Oct. 23, the index had dropped 33.23%.
Markets in Eastern Europe and Latin America started plummeting before the Russian government's default on local debt and August currency devaluation.
And U.S. institutional investors had begun pulling back from emerging markets before the tough third quarter. U.S. pension funds and other tax-exempt investors clearly put less money into the emerging markets over the first six months of 1998 vs. the same period last year, according to a recent survey by InterSec Research Corp., Stamford, Conn.
Emerging markets mandates by U.S. tax exempts totaled $540 million in the first half of 1998, down 62% from $1.43 billion in the first half of 1997, according to an InterSec survey of 200 money managers.
Although they might recently have cut back funding or switched managers, some pension fund executives still see the value of buying into emerging markets.
"I think you're seeing good opportunities in the emerging markets," said Tom Milne, chief investment officer for the $21 billion Tennessee Consolidated Retirement System, Nashville. Some Asian emerging markets, particularly Singapore, Thailand and Malaysia, have seen valuations of companies drop significantly in recent months.
The fund switched managers last quarter when it fired INVESCO and hired Capital Guardian Trust Co., Los Angeles, to run about $100 million in emerging markets equities. The fund switched because it was disappointed in INVESCO "lagging performance and turnover (of staff)," Mr. Milne said.
"We hope to have the opportunity to work with Tennessee Consolidated in the future," an INVESCO spokeswoman said.
Tennessee Consolidated also hired Newgate Management Associates, Greenwich, Conn., in June to run $37 million in domestic and international closed-end funds.
By the end of the year, the fund will boost its allocation to international money managers from its current 5.5% to its target 7%, Mr. Milne said. Slices of that will go to Capital Guardian, Newgate, and six other international equity managers, Mr. Milne said.
He did not specify how much would be invested in emerging markets, saying only there would be "some sort of allocation." He added that funding would probably come from cash.
Novartis Corp., New York, also changed emerging markets equities managers, said Bill McHugh, vice president and treasurer. Novartis has $2 billion in its defined benefit plan.
In September, Novartis hired Scudder Kemper Investments Inc., New York, to manage $20 million in emerging markets equities. This came after it fired a manager. Mr. McHugh declined to name the firm that previously ran $35 million for Novartis. He said the fund's target for emerging markets was $40 million.
He added, however, the reason for not reinvesting fully with Scudder Kemper had less to do with markets than the potential changes in the Novartis fund's liability structure, due to the completion last year of the company's merger.
Mr. McHugh said he was aware of the risk inherent in emerging markets. Their volatility "doesn't surprise us. It's the price you pay for potential high returns," he said.
SEI Investments, Oaks, Pa., boosted its emerging markets equity portfolio by $75 million in September, said Christopher Vella, senior investment analyst. It hired Nicholas-Applegate Capital Management, San Diego, to run the account, and funding came from new clients and rebalancing existing portfolios.
The asset manager and investment adviser now has $500 million in exposure to emerging markets, which includes the new account with Nicholas-Applegate and four separate regional managers, Mr. Vella said.
Along with SEI Investments, Nicholas-Applegate won two emerging markets mandates in the quarter, said Rick Shaughnessy, spokesman. He declined to name the other clients.
And the $21 billion Massachusetts Pensions Reserves System, Boston, hired Schroder Capital Management International, New York, in September to run $75 million in emerging markets equities, said Scott Henderson, executive director and general counsel.
The hiring was the fund's attempt to bring its long-term asset allocation to emerging markets back in line to 4% of the fund's total, he said. The asset class had fallen to about 2.9% of the fund's total as global markets slid this year. Funding came from rebalancing.
The fund could increase that amount to $200 million -- depending on what happens in emerging markets, Mr. Henderson said.