Active money managers with heavy exposures to emerging markets are bracing for more pain, even as rock-bottom valuations suggest a turnaround may be in store for 2016.
Debt and equities strategies invested in developing economies have been persistently underperforming their developed market equivalents, leading to asset outflows at levels not seen since the financial crisis. As a result, shares in publicly listed managers with an emerging markets bent have been pummeled.
For example, share prices of Aberdeen Asset Management Inc., Franklin Resources Inc. and Ashmore Group PLC have fallen about 30%, 32% and 16%, respectively, in the six months through Dec. 18. By comparison, the MSCI World Financials index lost about 10% during the same period, according to Bloomberg data.
Unlike the largely retail emerging markets outflows during the “taper tantrum” two years ago after the Federal Reserve indicated the imminent reduction of its quantitative easing program, 2015's capital flight is more institutionally driven, said Robin Koepke, economist and expert on global capital flows at the Institute of International Finance, Washington.
Data from eVestment LLC indicate institutions pulled about $8.6 billion from emerging markets fixed-income strategies in the three quarters through Sept. 30, compared with net inflows of $16.5 billion during the same period two years ago. Leading the way are public pension funds, sovereign wealth funds and superannuation funds. Emerging markets equities fared little better, accounting for $4.3 billion in net institutional outflows compared with a $24.7 billion net inflow during the same period in 2013.
“The question is how long (emerging markets underperformance) will continue and what can be done” to mitigate further deterioration, said Jeffrey Levi, partner at money manager consultant Casey Quirk & Associates LLC, Darien, Conn.
Several factors — including the Federal Reserve's first interest rate increase for nearly a decade on Dec. 16, China's slowing economic growth and “lower for longer” oil prices — are contributing to fears that more turmoil might be ahead for emerging markets. As a result, some money managers with a sizable emerging markets business — whether through dedicated strategies or as part of their global and international portfolios — are slashing operating costs to help protect profitability, consultants said. They're also investing in new strategies to help plug outflows elsewhere.
“M&A is critical as (emerging markets) managers attempt to diversify away from their core capabilities,” said Mr. Levi.