Australian institutional investors are increasingly carving out emerging markets coverage within their broad international equity portfolio, but there is little appetite yet for an ‘unconstrained’ approach to the asset class, according to Investec Asset Management. The South African-owned manager is well-placed to comment on buying patterns in the asset class, because its emerging markets capability grew out of its existing global equity team, following requests from clients. That means the 12-person global equity team, based in London, also runs Investec’s emerging markets and Asia ex- Japan funds, and as such does not subscribe to the need for analysts dotted around the globe.

“Meeting management has never been part of our strategy, we think in emerging markets that it’s particularly important to be dispassionate,” said Investec’s portfolio manager for emerging markets, Archie Hart, who also covers the consumer sector in the global equities team. “These days they can’t tell you anything anyway.” Clocking up its 10-year anniversary in July, Investec’s emerging markets fund has cranked out 2 per cent gross annualised outperformance of its MSCI Developing Markets benchmark, while its Asia fund has beaten its regional benchmark by a gross 3.8 per cent compounded over the decade.

The emerging markets fund has a tracking error of 8 per cent, which Hart said was probably at the limits of current institutional appetite for risk, particularly in an environment where many fiduciaries were still implementing passively managed programs for equities, and dialling up their defensive allocations. The Investec approach is bottom-up, but the largest country overweight washing out at the moment is to Korea. “You have a lot of Korean companies giving you exposure to the Chinese consumer. It’s a backdoor into the Chinese mainland except you’re paying nine times earnings instead of the 20 or 25 times you’re paying for A-Shares,” Hart said.

He added that Investec was staying away from Chinese banks at present, due to regulatory questions raised by their recent forced recapitalisation to the tune of US$70 billion, and the uncertain outcome of ‘stress tests’ announced by the Chinese government last month. Emerging markets are in the unusual position of trading at a lower price:earnings multiples than their developed markets counterparts – 10 times versus 10.5 times – but are producing slightly higher earnings per share growth, Hart added.

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