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Multi-asset funds stick with stormy emerging markets

Multi-asset funds stick with stormy emerging markets

by Rob Griffin Jun 06, 2018 at 15:30


Emerging market equities and bonds have suffered outflows in recent weeks. But multi-asset managers still believe in their longer term story.

Investors withdrew millions of dollars in early May, due to the strong US dollar and fears over the prospects of Argentina and Turkey. Argentina called for International Monetary Fund support after its currency fell, but Turkey’s position remains precarious.

However, Peter Sleep, senior investment manager at Seven Investment Management, does not believe the outflows will be a longer term trend. ‘Many investors are more driven by momentum than fundamentals. So if they see things go down, they sell,’ he said. ‘But investment management is more long term.’

Sleep insists emerging market equities and bonds play an important role in multi-asset portfolios. ‘They’re less correlated with developed equity and bond markets, which makes them great diversifiers,’ he said.

Sleep says this benefit outweighs the relatively high volatility of emerging market investments. ‘It’s so hard to find uncorrelated assets,’ he added.

Looking ahead, Sleep predicts the big issue in coming years will be the inclusion of China in major bond and equity indices. ‘It will make up about 45% of the MSCI Emerging Market index when fully incorporated,’ he said. ‘It’s the world’s second biggest equity market and second biggest bond market, and could be disruptive when it goes in.’

Juliet Schooling Latter, investment adviser on the VT Chelsea Managed funds, said emerging markets were in better shape than five years ago. But she added: ‘There are many different economies and stock markets in this asset class; some will do better than others.’

She pointed out the underperformance of many emerging markets could now present a buying opportunity. ‘India is domestically focused, and we like it as a long-term investment,’ she said. ‘The recent sell-off means it’s less expensive than usual.’

Need to differentiate

Emerging market debt is a satellite position for Schooling Latter, who holds around 4% in the VT Chelsea Managed Monthly Income fund. ‘We also really like the M&G Emerging Markets Bond fund. Its [Citywire AA-rated] manager, Claudia Calich, is an expert in her field and an extremely good stock picker,’ she said.

Regarding equities, Schooling Latter generally has a natural overweight to the emerging markets. ‘We’re long-term investors and think trends are very positive for the next 20 to 30 years,’ she said. Her favoured funds include Hermes Asia ex Japan Equity , run by Citywire AA-rated Jonathan Pines; Goldman Sachs India Equity Portfolio ; RWC Global Emerging Markets ; and Janus Henderson Emerging Market Opportunities , run by May Ling Wee and Citywire AA-rated Charlie Awdry.

Thomas Wells, multi-asset fund manager at Aviva Investors, insists market commentators are wrong when they view emerging markets uniformly. ‘Commentators often don’t differentiate between hard and local currency government bonds or between bonds and equities. They simply refer to emerging market risk,’ he said.

However, he accepts emerging markets face some common risks, such as a strong US dollar. ‘It’s no coincidence emerging market assets fell across the board in the past month. This was a period when the dollar gained nearly 5% on a trade-weighted basis,’ he said.

Solid ground

At the same time, 10-year US treasuries have breached the key 3% yield level, which Wells believes undermines the appeal of emerging market assets. ‘Market pundits have latched on to the perfect storm engulfing emerging market risk assets. But we believe these worries are unfounded in the long term,’ he added.

Indeed, Wells is optimistic about the longer term outlook for emerging equities and bonds (in both hard and local currencies). ‘Investors should be prepared for a short-term rocky period, but the fundamentals underpinning equities and debt remain positive,’ he said.

‘Idiosyncratic problems may affect debt in Argentina and Turkey. But that merely highlights the need for careful selection.’

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