Emerging Markets (EM) Equities – where in the world do global managers get their exposure?

November 7, 2016 Categories: Investment, Markets

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Recently, an increasing number of global equity managers have started to manage against an All-World benchmark (including EM) rather than a Developed benchmark (ex-EM). For busy investors with limited time and resources, it might look like a quick win to have their global equity manager cover EM too. But not so fast! EM merits some serious evaluation:

  1. EM offers a massive range of opportunity, with the Russell EM index comprising over 3,100 stocks in 21 countries. Add in Frontier stocks too, and you have an extra 465 stocks and 32 countries. Taken together, these represent 58% of the world’s GDP and 85% of the world’s population.
  2. Active global equity managers typically run fairly concentrated portfolios. That means they are limited in terms of where they can go to get EM exposure.
  3. EM currently represents 11% of world market cap1, and over time that percentage has been on a rising trend-line. If, as we expect, EM’s share of market cap continues to rise in line with share of GDP and population, EM will easily surpass its previous peak of 14% and exceed 20% of world market cap in only a few years. So investors who want comprehensive coverage need to make sure that their global manager can get adequate exposure to this asset class.

Using our manager database, my colleague Monika Woloszczuk has taken a look at the stocks that global equity managers actually hold in their portfolios, and how and where they get their EM exposure. Generally speaking:

  • Global managers mostly have room for only a handful of EM names in their portfolios
  • Typically they pick from only the largest cap stocks in the EM universe
  • Their EM holdings are concentrated in just a few countries (mostly China, South Korea, India, Brazil, and Taiwan)
  • They mainly focus on the most developed end of the EM spectrum, which has the most intensive analyst coverage and typically offers least opportunity to add value through active stock selection.

In other words, most active global managers looking for EM exposure necessarily gravitate to a handful of the most popular and crowded places. Put simply, that’s the investment equivalent of always taking your holidays in Benidorm or Bodrum. It’s easy to do, but not necessarily the most attractive opportunity!

If that strikes you as a far-fetched comparison, let’s consider Monika’s findings, and take a look at her table below:

Of the 60 traditional active global equity managers whose portfolios she analysed, only 3 held stocks in 10 or more EM countries. Half invested in 4 or fewer countries. 29 out of 60 held 5 or fewer individual EM stock names.

Stock Name Country Market Value(USD billion) Number of Managers Weight in Russell Emerging Markets Index
Analyst Coverage
Samsung Electronics South Korea 219.5 21 3.14% 42
Baidu China 60.6 18 1.20% 27
ICICI Bank India 22.5 14 0.26% 42
Alibaba China 256.6 13 1.70% 38
Taiwan Semiconductor Manufacturing Taiwan 152.3 12 2.43% 30
Tencent China 254.8 14 2.25% 35
HDFC Bank India 47.1 9 0.00% 49
Naspers2 South Africa 69.2 10 1.31% 8
Ambev Brazil 96.2 5 0.62% 14
China Mobile China 245.6 7 1.45% 24

Source: Russell Investments/Factset. 60 traditional active global equity manager portfolios.

Now in the interests of full disclosure, we have to add that there are exceptions to our general rules.

Some active quant managers hold a much wider range of exposures, via a large number of smaller positions across EM. We research a number of active quants with robust processes that can successfully combine Global and EM stock-ranking algorithms.

But even active quants can’t provide the same level of diversification as dedicated EM specialists. That’s why in our own multi-strategy, multi-manager All-World global equity portfolios, we use custom EM portfolios based on the full range of EM ideas from some of our top-rated third-party EM specialists. And that’s why in our dedicated EM Funds, we use a whole range of global EM specialist managers, local EM managers, Frontier specialists and custom portfolios created by our own experts.

In summary, we believe that EM is an important asset class full of opportunity, and that it merits comprehensive coverage via specialist managers. In our view, the EM world is set to generate an increasing number of interesting and attractive investments in future.
On the other hand, Benidorm and Bodrum can be nice too…

1 Source: Russell Global Index. If mainland China A shares were included in the calculation, the weight of China would more than double and EM’s share of global market cap would rise to over 14%.
2 Naspers is a technology investment company with sizeable investments in Tencent, Mail.ru and Flipkart.

David Millen, Investment Communications, EMEA Investment Division

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