Specialists needed to deliver outperformance
Emerging market growth is an easy story for asset managers to sell, making it child’s play to launch funds and raise money. This in itself is enough to make some wealth managers cautious.
“An investment that is flavour of the month with the retail sector is normally not a good signal,” says Hugh Adlington, investment director at Rathbones. “There are so many following winds such as positive demographics, urbanisation of the workforce and infrastructure build. Many emerging markets have benefited from having little credit expansion and government finances have tended to be in good shape because they cut back following their own crisis in the 90s.”
Mr Adlington prefers specialist managers for this space rather than the major Jack-of-all-trades investment groups. “We try to focus on specialists who have some skin in the game and presence on the ground, and we are happy for them to take big bets,” he says, adding that with 30 per cent of Brazil’s index composed of iron ore giant Vale and state-run oil company Petrobras, a manager has to take big off-benchmark positions to achieve outperformance.
The predominance of big commodity exporters in the indices has certainly been a performance drag for trackers, because they have missed out on the superior returns of smaller, domestically-oriented consumer companies, such as food distributors and retailers.
Investors are also becoming more selective in their approach to different geographies, looking beyond random groupings such as Bric (Brazil, Russia, India and China). “The role of China in driving Asian regional growth and the world at large should remain intact,” predicts Nicolas de Skowronski, head of investment advisory, at Bank Julius Baer.
“We expect economic conditions in Mexico and Brazil to improve and/or retain their positive dynamic in 2011. While we expect the economic recovery in Russia to gain traction next year, there are relatively few catalysts compared to emerging Asia and Latin America to warrant investors taking on substantial positions there.
“For wealth management clients, we are keeping our strong preference for emerging Asian stocks with Thailand as our favourite country, reinforced by the recent step by the Thai authorities to fend off inflation risks,” he says. “In Latin America, Brazil is our key call, supported by the impressive domestic demand dynamics. From a sector point of view, the longer-term shift of major Asian economies to more domestic oriented growth bodes well for consumer-related stocks.”
Like Mr Adlington, Mr de Skowronski also believes that “a diversified selection of US and European stocks with a marked sales exposure to Asia may be appropriate for investors who seek exposure to Asia but are unwilling to invest directly into Asia itself.”
