Mark Mobius says finicky pension funds flee emerging markets

You wouldn't expect pension funds to sell in a hurry. But that's exactly what they're doing now in emerging markets, according to Mark Mobius.

Patient as they are, pension funds are also famously risk-averse, said the 81-year-old investor who set up Mobius Capital Partners after leaving Franklin Templeton Investments this year. That's pushed them to cut risk all around, selling in both developed and developing countries, he said in a phone iTempleton Investments this year. That's pushed them to cut risk all around, selling in both developed and developing countries, he said in a phone interview.

"More and more of these pension funds are buying ETFs and when the market goes down, the tendency for them is to reduce," Mr. Mobius said. "You have a strange situation in that although they may tend to be long-term investors, they want to get out and be safe."

That's bad news for emerging market bulls who had been touting enhanced interest from U.S. pension funds as a backstop against sustained losses in emerging equities on the grounds the funds don't buy easily, but once they buy, they don't sell for a long time.

If Mr. Mobius is right, that hope has been belied in the current sell-off. Investor nervousness is becoming more visible: developing nation stock volatility is surging the most since 2000.

Investors have pulled more than $6 billion from bond markets since mid-April, according to the Institute of International Finance, as the rise in the U.S. dollar and yields curbs appetite for risky assets. It's a marked shift for emerging markets, which enjoyed a two-year rally that boosted stocks and a gauge of currencies to the highest level since at least 2007. The MSCI emerging market stock index rose 0.2% Wednesday, trimming this year's losses to 1.2%.

"In the big bull market you had in the U.S. for so long, being in ETFs was very gratifying for a lot of these institutions, but just when things turn and everybody tries to head for the doors at the same time, you can have really big volatility," Mr. Mobius said. "That is one of the reasons why you have the volatility."

Last year, institutional money flows into emerging market equities almost tripled, boosting their total net assets for equities to $318.6 billion as of the end of last year, according to data from Morningstar. They ended 2017 with $192.7 billion worth of bonds, the data show.

Mr. Mobius says pulling out of emerging markets because of short-term volatility is the wrong strategy.

"There is a good chance they will have a correction, which is fine, I would personally prefer to see a good correction so that the market becomes cheaper and we start investing," said Mr. Mobius. "I am very bullish on emerging markets long term, but short term you can have incredible volatility."