However, other money managers are more skeptical, pointing to longer-term fundamentals driving them to underweight emerging markets. According to the latest BofA Merrill Lynch Fund Manager Survey, 9% of the managers surveyed in June are underweight emerging markets equities — the first time the survey recorded an underweight position since 2009. The move was despite an overall increase in equity allocations, with 48% of the managers reporting an overweight position in equities. Furthermore, 25% of the global managers surveyed said emerging markets is where they're most likely to be underweight in the next 12 months.
“We have come across a whole new set of issues in terms of accessing emerging markets,” said Gustavo Galindo, New York-based portfolio manager at Russell Investments who is responsible for the multimanager Russell Emerging Markets Fund.
Central among those concerns has been China, where lower-than-expected growth helped to send the Shanghai SSE Composite index down 7.6% so far this year and put a drag on broader emerging markets and commodities indexes, sources said. Political issues in nations including Brazil and Turkey are also making investors nervous.
“We've been quite negative on emerging markets for the past few years, and recent concerns over (the end of quantitative easing) have come on top of the negative view we already held,” said Maarten-Jan Bakkum, senior strategist in emerging markets equities at ING Investment Management, The Hague, Netherlands.
“Deteriorating growth prospects in China are key, but beyond China we see declining competitiveness, lack of structural reforms and regulatory risk rising in emerging markets,” Mr. Bakkum said. ING IM is underweight emerging markets within various global equities and multiasset portfolios. While the underweight levels vary, they're generally “about halfway to our maximum negative position,” Mr. Bakkum added. “I don't think we'll go back to an overweight position anytime soon.”
Remi Ajewole, London-based fund manager within the multiasset team at Schroder Investment Management, said the firm expects recent underperformance of emerging markets to persist in the short to medium term. “We're reassessing our outlook on emerging markets growth,” said Ms. Ajewole, adding the multiasset team has been underweight emerging markets in the past two years. “There's still a place for emerging markets, but we're not adding to our position right now.”
At Neptune, emerging markets account for about 15% of the global equity strategy, compared with about 50% of the portfolio three years earlier. Mr. Harvey said: “We'll need a lot more convincing ... before we start buying (emerging markets) again.”
Data Editor Timothy Pollard contributed to this article.