The story of emerging markets in the past decade has been filled with both hopes and disappointments. Despite bullish GDP growth in developing countries and the promises that came with it, the MSCI Emerging Markets index returned net 2.96 per cent per annum over the past ten years, significantly outpaced by the developed markets.
Some may argue that there has been an underestimation of risks in emerging markets, but JANA general manager of investment strategy Kirsten Temple said the disappointment is a product of “naive expectations”.
At the Fiduciary Investors Symposium, Temple said investors are “in the business of taking risks” at the end of the day.
“From my perspective…the risks are changing, and I think there is definitely a need to reassess [them] on a forward-looking basis as well,” she told the crowd in the Blue Mountains.
“But if you’re looking at why emerging markets have been disappointing over the last decade, it’s not really been the changing risk landscape so much as that the earnings haven’t come through, and the naive expectation that higher GDP growth would lead to higher returns for investors in those markets hasn’t really come through.”
Some global pension funds have been more bullish than their Australian counterparts on emerging markets so far, with Dutch fund APG recently calling for an up to 50 per cent portfolio allocation to Asia based on economic fundamentals.
But AustralianSuper senior director of investment risk and asset allocation Matthew Dive said the fund is “on the fence” on whether to commit further to EM. The $335 billion mega fund allocates broadly to global indices and doesn’t usually make country selections itself, but sometimes accepts bottom-up security selection from its asset managers or takes sectoral positions.
“For me, it’s a little bit about how you want to play that GDP growth [in EM],” he said.
“You would have been better off, 10 years ago, just buying Apple to access emerging market and the Asian consumption growth, as opposed to trying to pick winners in some of those markets, in our view.
“We’ve largely gone listed in terms of our EM investments, but we have also invested in the National Indian infrastructure fund.
“One of the attractive properties of that structure was the way that it took out some of the governance risks – quite a clever and pretty innovative structure to co-invest with the government, with the government there to sell down progressively over time.”
Quick thinking
Another essential skill to make the most out of EM, for the $151 billion retail fund giant Colonial First State, is being able to think quickly and react dynamically.
Taking the biggest EM country China, for example, CFS head of equities Ben Lam said “there’s a lot of managers who put China away and said the hurdle rate for them to invest in China is very high…but I think having managers who have an openness [in their view] as things evolve, and to actually adapt and change that view, to me is critical.”
He said the fund is finding quant strategy as an efficient way to access emerging markets.
“Having some form of discipline and risk management around exposures has been a good way, at least from an alpha perspective, to get pretty consistent outcomes,” Lam said.
“Because with concentrated strategies…there are so many different countries in emerging markets, trying to manage that risk with a bottom-up kind of 30/40 stock portfolio is quite challenging.”
Despite some industry views that super funds tend to de-risk their portfolios too early in the face of geopolitical uncertainties, the panel agreed that from a governance perspective, asset owners should be alert to the broader environment around their emerging markets holdings.
Dive said that ahead of the Russian invasion of Ukraine, AustralianSuper had a below-benchmark exposure to Russian assets.
“It did take a little bit too long to get on top of our [Russian] exposures – especially our indirect exposures in terms of supply chains and the like – to get our head around sanctions, and then to communicate with stakeholders, especially members, but also the board and Investment Committee and the like,” he said.
“We’ve done a fair bit of work to tighten up those areas.
“Has it changed the way that we manage the portfolio? Not to a great extent. But we have been fielding questions from members around our exposure to Israel [and] to supplies of armaments to Israel.
“And we’ve been able to respond to those sorts of queries. I think stakeholder management is an important part of what we do as funds and what we do as custodians of members money.”
