Allocations to emerging markets as one homogenous region remains a largely unattractive bet, but some institutional investors and money managers increasingly are turning to specific countries or regions to try their investment luck.
Executives at consultants and money management firms said they are talking to institutional investors about adding to emerging markets allocations through single-country investments, with some evidence of money flowing into strategies.
“A number of pension schemes are entering single emerging market areas,” said Mauro Ratto, London-based head of emerging markets at Pioneer Investments.
And while sources acknowledged that interest in certain emerging market countries, based on recent good news, is cyclical, this time around there is an added force. “It is one of the consequences of the unconventional monetary policy that is dominating in the market. Indeed quantitative easing is pushing down rates in some cases into negative territory. Consequently, certain segments of investors are forced to look for better returns,” Mr. Ratto said.
“We have looked in some detail at this issue” of investing in specific markets rather than broadly, said Iain Douglas, New York-based head of emerging markets equity manager research at Towers Watson & Co. Clients with higher governance and asset size are showing interest in more niche emerging markets exposure, he said, while the majority of clients — where they have a dedicated emerging markets allocation — take a “very broad, somewhat active, exposure, which tends to look somewhat like the index emerging markets equity exposure.”
“We certainly find (specific country) ideas we think are interesting, but getting those into client portfolios is a real challenge,” particularly when it comes to having the governance necessary to monitor more managers, and having significant enough asset size to keep fees low, Mr. Douglas said.
Emerging markets as a whole have been suffering. The MSCI Emerging Markets index returned -2.38% in the month ended Nov. 10, and -10.74% year-to-date through Nov. 10. The MSCI All-Country World index gained 1.5% for the month through Nov. 10, but lost 0.14% year-to-date.
But sources at money management firms and institutional investors said bright spots are emerging, including Russia and India, and highlighted recent bets singling out specific emerging markets countries. The $296.7 billion California Public Employees' Retirement System, Sacramento, has built a $250 million position in Russia currency notes, and thinks a stable ruble might allow it to continue to purchase Russian bonds, according to Bloomberg. This month, emerging markets equities manager Charlemagne Capital Ltd. announced a new segregated emerging market equity hire from a Scandinavian pension fund looking to gain exposure in Latin American equities.
Data from provider EPFR Global show mixed signals from institutional investors using mutual funds, said Cameron Brandt, director of research in Cambridge, Mass. Data show between Sept. 1 and early November, South Africa, Poland, Brazil, China and Russia equity strategies attracted net institutional inflows. All emerging markets equity funds showed net inflows for most of October, but net outflows for the first week in November. Specific figures were not available.
While overall emerging markets equity funds attracted net inflows for eight of nine quarters, for the quarters ended March 31, 2013, to March 31, 2015, most single-country strategies in provider eVestment LLC's database recorded net outflows. When overall emerging markets equities recorded net outflows, of $6.2 billion over the three months ended June 30, those focused on Greater China, India, Korea and South Africa equities also recorded net outflows.