He says it’s “not just about looking at a whole bunch of numbers” but real fundamental reasons: why people are moving from rural areas to cities, striving for a higher income and wanting financial security.
“These are all qualitative factors that people don’t take into account and they just look at the quant and make a decision based on that,” Wu says.
“That will not work in the long term.
“Asia makes up 25 per cent of the world’s global equity markets by market cap. If I add in the rest of the emerging markets, you’re looking at around 35 and not one market index in the world actually reflects that,” he says.
“If advisers want to get real returns in the next 10 to 15 years, they have to start looking at specialist managers and not just broad market balanced fund or aggressive fund or whatever they’ve been doing.”
ATTRACTIVE ASPECTS
There have been a noticeable number of new fund managers in the global emerging markets space, according to Briana Lam, senior investment analyst at van Eyk.
“We think that we’ll definitely have some new candidates to consider as well as some of the more established managers, which we have seen before,” she says.
“Everybody’s been fixated on the Chinese growth story, especially from an Australian point of view, being in the same region.
“Managers are in one part responding to investor demand for exposure to the area; and on the other hand, they’re also developing their own expertise: getting more people in the field, opening more offices in the emerging market regions and as a result, bringing new products out.”
John O’Brien, head of research at van Eyk, says emerging market performance is generating more interest, but warns “they are more volatile than traditional developed markets”.
Van Eyk makes recommendations about how much of an investor’s portfolio should be allocated to emerging markets.
“Our current target allocation is about four-and-a-half per cent in the overall portfolio,” O’Brien says.
“Our current tactical allocation is slightly under that, it’s about three-and-a- half per cent.
“It’s primarily due to the fact that the valuation from emerging markets – even though they’re more attractive than they have been in the past – they’re still not at the level that would warrant a strong buy opportunity.”
According to James White, senior analyst, investment markets research at Colonial First State Global Asset Management, the performance of emerging markets over the last three years has “highlighted that they are just growing on the basis of much stronger fundamentals than exist elsewhere in the world”.
He says that they now stand out as being better run and with greater growth potential than the developed world.
“It’s important to remember, particularly in the case of a country like India, that we’re talking about an extremely impoverished country with very, very low standards of living. So obviously, in that environment growth is also much easier to come across than in the case of a developed world economy.”
He says although they’re high risk, the growth profile is there.
“It’s just a matter of being very careful of the timing and price entry and also the investment horizon that people have, because these economies and these assets represent rare opportunities in a world where you’ve got problems of debt and policy in the developed world.
“As a result, there is a risk that you can pay too much for these assets.”
STILL TOO RISKY
Andrew Jones, director of Eureka Financial Group, says that emerging markets have a place in his portfolios through a core-satellite approach.
“We would see emerging markets still being part of the satellite of a portfolio, which means while we think there is growth and return in that sector, in that type of investment, there is also a lot of volatility,” he says.
“Therefore, we’re still finding that we have to be quite modest with the allocation; so we do have emerging markets in our portfolios, but it’s between five and 10 per cent of a portfolio. That’s a guide.
“For the extra risk, you [want] a healthy double-digit return because you know you can wear it negative.
Jones says a higher percentage allocation into emerging markets is too risky.
“The volatility is the main risk and that is when more people are moving out of the market, prices will fall – so growth disappears, or there’s not an appetite during a certain quarter or period of the market.
“If there’s a retreat from growth assets, then you’ll see emerging equities get whacked around as too will, typically but not always, the smaller cap markets domestically,” he says.
“There’s a close correlation between, say, small cap investing and emerging markets. Small cap Aussie investing and emerging markets have similar sorts of standard deviation performance on volatility when people get concerned about growth in economies and profits and so forth.”
Irina Miklavchich, fund manager of Threadneedle Global Emerging Markets Equity Fund, says there’s now a more positive view by the global market on the asset class.
“It’s at an attractive level, relative to the developed world equities,” she says.
“Looking at the sovereign balance sheets of emerging markets, they are in a much better shape than what is the case in the developed world.
“So one could say that better sovereign balance sheets deserve a re-rating of emerging markets, relative to their developed world peers.”
