While money managers continue to grapple with trying to pinpoint the right time to add to emerging markets allocations, institutional investors also are bombarding them with questions about the right way to gain exposure.
Sources said pension fund allocations to emerging markets remain low relative to the percentage of world GDP these countries represent, and some institutional investors still have no exposure. The Institute of International Finance said in its April 2015 Trends in Investment Fund Portfolio Allocation report that about 13% of investors' equities and bonds portfolios were allocated to emerging markets.
But allocations are set to grow.
“Emerging markets is already 50% of GDP, and more than 80% of the global population,” said Gerardo Rodriguez, managing director, portfolio manager for the emerging markets allocation fund, and head of emerging markets multiasset strategies, at BlackRock Inc. in New York. But emerging markets only represent about 13% of world market capitalization. “Emerging markets will grow larger, and that will use more space in institutional portfolios for the years to come,” he said.
The $181.3 billion California State Teachers' Retirement System, West Sacramento, is in the midst of an asset allocation study, and has an idea of how assets will shift.
“One move in the portfolio will be a bit more of a global weighting in our equity portfolio,” said Christopher J. Ailman, chief investment officer. “We have always had a strong home bias, and that will cause us to increase non-U.S., and critically emerging markets, exposure. But we have said we need to have a real heart-to-heart discussion when it comes to governance — and active management — as size can be a constraint.”
Iain Douglas, New York-based head of emerging markets equity manager research at Towers Watson & Co., said a rebalancing process is going on for U.S. institutional investors, away from their U.S. overweight allocations and into, in part, emerging markets.
“On the equity side there is a lot of conversation on how to get access to emerging markets; investors might have a U.S., global and broadly diversified emerging markets manager. Rather than that structure, we are talking to clients about getting their emerging markets beta or exposure through global or ex-U.S. managers, and then adding more highly active and niche emerging markets managers to provide complementary emerging markets exposure,” he said. Standard, broad emerging markets equity strategies “are generally not good value for money,” he added, and while the consultant is willing to pay fees for added value, “broadly diversified emerging markets managers as a group just haven't delivered value after fees.”
Mark Weiller, New York-based head of distribution at newly launched emerging markets money manager New Sparta Asset Management, which will focus initially on private investment opportunities in Africa energy projects, said there has been a move away from broad diversified emerging markets allocation, “but what we are experiencing on a global basis is a movement away from public markets in exposure.” He has seen increased demand and allocation for private equity and private debt in emerging markets from institutional investors.
Jonathan Grabel, chief investment officer at the $14.5 billion New Mexico Public Employees Retirement Association, Santa Fe, said there is a diversification benefit from allocating to emerging markets private equity, giving exposure to areas not available through public equity allocation. New Mexico PERA is also looking for a partner for a separate account, focused on emerging markets private equity, since it is difficult for an investor to invest in those markets without boots on the ground.
