Assets under management in emerging markets equities and debt rebounded in 2016 as managers in both asset classes more than withstood geopolitical headwinds from Brexit and the U.S. presidential election.
“The markets do a pretty good job of pricing in” geopolitical risk, said Stephen Clark, head of global institutional services at Dimensional Fund Advisors, Austin, Texas, and president of Dimensional International. “And if they don't, they adjust pretty quickly.”
Emerging markets equity assets managed for U.S. institutional tax-exempt clients totaled $331.7 billion as of Dec. 31, according to Pensions & Investments' annual survey. That's up 9.6% from Dec. 31, 2015. Emerging markets debt assets under management totaled $84.9 billion, up 6.6%.
Those gains reversed the results of 2015, when AUM in emerging markets equity dipped 0.6% and emerging markets debt assets were down 6.7%, according to P&I data.
The 2016 increase was concentrated among the top 25 managers in both emerging markets categories. A total of $270.2 billion in 2016 was managed by the top 25 managers of emerging market equity assets, up 30% from 2015, and a combined $80 billion was managed in emerging markets debt assets, a 59% increase.
Dimensional Fund Advisors continued its pole position in emerging markets equities in 2016, with $48.9 billion under management as of Dec. 31. The figure is 21% above the $40.5 billion Dimensional reported in 2015.
In emerging markets debt, Nuveen — which was rebranded from TIAA Global Asset Management in 2016 — led the list with $9.7 billion in assets, though down about 1% from the combined total of the previous year.
Sources said asset gains of managers were driven more by strong performance than inflows. The Morgan Stanley Capital International Emerging Markets index was up 11.2%, while the J.P. Morgan Emerging Markets Bond Global Diversified index returned 9.9%.
“If you look at the representative index, it looks like the rise in assets is in line with that or a little below,” said Iain Douglas, senior investment consultant and head of emerging markets equity manager research, Willis Towers Watson PLC, New York. “It looks like asset inflows have been steady but that the market is going up.”
Added Rich Nuzum, senior partner and business leader for growth markets, Mercer Investments, New York, “There's a story as to why there's increased demand” in emerging markets equities and debt. “The changes from 2015 to 2016 were mainly driven by return.
Mr. Nuzum said several factors point to future asset inflows into emerging markets and more RFPs for emerging markets managers.
“I think, back a year to 18 months ago, there was concern that we'd see the end of conservative monetary policy and central bank activity that would hurt emerging markets, particularly in debt denominated in U.S. dollars,” said Mr. Nuzum. “The concern was that if interest rates rose, companies would have a tougher time. The other uncertainty was Brexit, the Trump election and the rise of anti-globalization, and how that would hurt trade and the global economy. But the worst has not come to pass. It's almost a year since the Brexit vote and just over 100 days for Trump; we haven't seen any rollback in globalization or free trade. And the French vote didn't go down the path of leaving the EU.”
Mr. Nuzum added that oil and gas prices have stayed down. “That does have a negative effect on some emerging markets countries that depend on their energy production,” he said, “but a large portion of emerging markets and frontier markets are commodity importers, and the lower energy costs will help their balance sheets.”