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AXA Rosenberg Investment Management is launching an Australiandomiciled wholesale trust to accommodate what it believes will be a surge in demand for active emerging markets allocations. As the de-coupled theory that emerging markets would avoid the global downturn turned out to be unfounded in the past year, the number of companies trading at below their book value has risen to record levels, according to Bill Ricks, the chief investment officer for AXA Rosenberg in the Americas.

He said on a visit to Australia in April that emerging markets were on average in a better position for strong growth over the medium term than the developed markets. The quant manager’s emerging markets strategy, launched in 2006, is country neutral and mirrors the firm’s process for active equities management in developed markets based on future earnings forecasts.

The firm has about $1 billion in the strategy. Kathryn McDonald, the new head of investments for AXA Rosenberg in Australia, said many stocks across emerging markets were trading further away from their fair value, opening the door for investors to profit from the spread.

“During periods of book to- price compression, such as 2004 – 2007, we saw many companies trading at very similar valuations, however, we are now seeing an expansion of spreads across many valuation measures, such as book-to-price,” she said. “It follows that active managers who have true valuation insights stand to gain more as prices converge towards fair value.” Research based on emerging markets stocks between 2001-2008 shows that the top 20 per cent of companies based on realised one-year future earnings per dollar of initial cost outperformed the corresponding market average by 30 per cent.

McDonald said: “Emerging markets equities with a higher earnings yield tend to outperform those with a lower yield. Although gathering and analysing corporate financial data in emerging markets remain challenging, we believe there is enough quality data across a great many companies to make individual security analysis a fruitful endeavour.”

Nevertheless, Ricks said that the responsiveness of emerging markets to information was on a par with that of developed markets. “As long as there is a strong connection between a company’s ability to generate profits and the stock price, then the world has not changed. That relationship in emerging markets is as strong or stronger than in the developed world,” he said.

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