Going native might be the best way for money managers to build successful emerging markets client businesses over the long term, some market veterans argue.
Building home-grown investment teams to serve emerging markets investors focused, at first, on domestic stocks and bonds is “the core” of Paris-based BNP Paribas Investment Partners strategy in those fast-growing markets, said Mark te Riele, the firm's London-based head of marketing for Asia-Pacific and emerging markets.
With that foundation, the firm is well placed to “ride the wave” of growing wealth that will inevitably lead those investors to diversify offshore, even as inflows from overseas investors are increasing, he said.
“Emerging markets clients will be a growth engine for global managers, if they're correctly positioned to take advantage of the opportunities,” agreed Glen Baptist, Newark, N.J.-based president and chief investment officer of Prudential International Investments. Local manufacturing is a key to that positioning, he said.
Bonn Liu, a Hong Kong-based partner and leader of KPMG's global investment management practice for the Asia-Pacific region, said in an e-mail that the argument that local manufacturing can yield long-term dividends has merit, but the “big question” is how long that long term can be.
A number of money management executives say they're prepared to play the long game.
For Prudential, which built or acquired manufacturing capabilities in China, Brazil and India over the past decade, the key “is patience” — having a long-term vision on the order of 20 to 25 years, said Mr. Baptist.
Prudential International Investments, the Prudential Financial Inc. arm focused on building domestic asset management capabilities overseas, is separate from the affiliate that provides Prudential's global capabilities to the biggest institutional investors in emerging markets. Over the long run, the “intersection” or “cross-fertilization” of those two efforts should provide the company with synergies, he said.
Mr. Baptist said his business manages a “relatively small” $10 billion to $15 billion of emerging markets client money — perhaps 1% to 1.5% of the parent's $1 trillion in AUM. But with wealth building at the individual level in emerging markets, those businesses in China, Brazil and India will grow substantially over time, he said.
Executives with other firms say the dividends of their emerging markets client strategies already are coming through.
Mr. te Riele said BNP Paribas Investment Partners' mix of domestic operations — in Turkey, five markets in Latin American and 11 markets in Asia — and the firm's sizable business serving big public institutional investors in those markets has lifted emerging markets client assets to 15% of overall AUM, or roughly $90 billion, from less than 11% five years ago, he said.
Jim McCaughan, the CEO of Principal Global Investors, said his firm has made the most progress in markets with defined contribution retirement plans, with more than $100 billion in AUM across Brazil, Chile and Mexico.
The vast bulk of those assets remain invested in local stocks and bonds. That's understandable, considering that sovereign bonds in a market such as Brazil offer double-digit returns, said Mr. McCaughan. Nevertheless, that “very strong bias” for domestic assets eventually will give way, setting the stage for a quarter to a third of that huge pool of Brazilian assets to find its way into offshore assets, he predicted.
For now, Mr. McCaughan said the toughest market to make progress in, for Principal and its competitors alike, has been India, where Principal has a mere $400 million to $500 million in AUM. Even so, his firm's investment in the country is an option worth paying to be there when positive things inevitably happen, he said.
Working with the right distributors — whether big banks or insurance companies — to reach the end client in emerging markets is a central challenge cited by many money management executives.
Michael O'Brien, London-based managing director and CEO for Europe, the Middle East and Africa, with J.P. Morgan Asset Management's global investment management business, said his firm has been doing a lot of work with distributors, such as insurance companies, in constructing efficient portfolios amid an ongoing process of deregulation.
Mark Talbot, Hong Kong-based managing director, Asia-Pacific ex-Japan, with Fidelity Worldwide Investments likewise noted that business related to insurers in the region has been “growing rapidly for us” over the past two years.
Mr. Talbot said that was in line with a broader shift in the region, where demand from central banks and sovereign wealth funds experienced the fastest growth for the first 10 to 15 years following the Asian financial crisis of 1997 and 1998. Over the past five years, it's been the private sector “where you can see economic growth filtering through.”
In the end, said Prudential's Mr. Baptist, focusing more on emerging market clients will be a crucial diversification for global money managers.
For markets like the U.S., Europe and Japan, the wealth accumulated over the past 40 years will be increasingly drawn down. “Asset managers focused entirely on those markets will see a dramatic shift” in terms of the way money is managed amid net outflows, said Mr. Baptist. Emerging markets will be the place money managers are still capturing growth.
A lot needs to happen to set the stage for the long-term scenario, in terms of regulations, including the incentives needed to encourage savings, said Mr. Baptist. But, noting how the U.S. retirement market grew faster than many people looking at the industry in the 1960s or 1970s would have expected, he said the pace of development could easily surprise again.