LONDON -- What goes up, must come down.
And the latest returns from emerging market equity fund managers such as INVESCO Asset Management Ltd., London; HSBC Asset Management Ltd., London; and Sanford C. Bernstein, New York, show they have had a roller-coaster ride in the past two years, according to returns from emerging market equity managers published by William M. Mercer Ltd., London.
Overall, last year's winner were this year's losers.
Among the fallen stars are INVESCO; Nicholas-Applegate Capital Management LP, San Diego; Baring Asset Management Ltd., London; and Foreign & Colonial Emerging Markets Ltd., London.
At the end of end June 1998 they were ranked first, third and joint sixth, respectively, against a peer group of 63. By June 30, 1999, they had fallen to positions 26, 41, 32 and 58, respectively, in a group of 58 managers.
But fortune this year smiled on HSBC, Bernstein, San Diego-based Brandes Investment Partners LP and Boston-based Grantham Mayo Van Otterloo & Co. They ranked first, second, third and fourth among their peers for the year through June 30, while a year earlier they ranked 55, 61, 63 and 59.
The collapse of the Asian markets in late 1997 and their subsequent recovery from the end of 1998 is the cause of this startling divergence in performance.
Investment funds underweight in Asia during the second half of 1997 and first half of 1998 did well during the 12 months through June 1998, but were not nimble enough to catch the crest of the wave of strong growth in the region during late 1998 and early 1999, said Bill Muysken, consultant with Mercer.
Very few managers underperformed the benchmark Morgan Stanley Capital International Emerging Markets Free index for the year through June 1998 but only a few outperformed during the year to the end of June 1999.
Mr. Muysken also noted the wide variation in performance between managers for the year ended June 30. There was a 61 percentage point spread between the best performing money manager, HSBC, and the worst, Foreign & Colonial.
"The main thing for plan sponsors is not to read too much into recent past performance," said Mr. Muysken.
Limited exposure to Asia during the initial stages of its recovery, transaction costs of buying in a rising market and a stock selection strategy biased to blue-chip equities pricked Foreign & Colonial's performance bubble in 1999, said global portfolio manager James Graham-Maw.
But the variation in performance was not simply the result of economic swings in Asia, said Stella Yiu, HSBC Asset Management's chief investment officer for emerging markets.
"After Brazil devalued, the picture changed for the better for all emerging markets," she said.
Pressure from investor redemptions during the year through June 1998 held back the performance of HSBC's dedicated emerging market funds of $850 million.
The group also was very cautious toward Asia during the first half of 1998. It began increasing its cash positions from the second quarter of 1998 and held its highest level of cash in the third quarter, shortly after the Russian bond default and during the global liquidity crisis. The group has increased its holdings in emerging-markets equities since the beginning of this year.
"The year to June 1998 was a particularly good year for us as we were underweight the poor performers in Asia. But that situation was reversed in the third quarter of 1998," said Rory Landman, head of global emerging market equities for Baring Asset Management.
With hindsight the money manager would have bought into Asia when the market bottomed out during the third quarter of last year, but Mr. Landman said he and his team were at that time unsure whether the tide had turned in Asia's favor.
Unfortunately for BAM, the tide had turned and the group, with $4 billion in assets under management in emerging markets, was unable to take full advantage. BAM is now slightly overweight the index in its exposure to Asia.
Grantham Mayo Van Otterloo took a "huge" bet on Thailand, Indonesia, the Philippines and Korea early last year in the expectation that these markets would strengthen over the long term, said fund manager Arjun Divecha.
The group, with emerging market assets under management of $1.3 billion, was more than 10 percentage points overweighted vs. the IFC Investible index, which had 14% allocated to South and Southeast Asian equities.
"At a specific point we were in Asia a bit too early, but I am now happy with that," he said.
Officials at INVESCO would not comment. "Volatility is not unusual in emerging markets," said a spokesman for Nicholas-Applegate.
