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Jerome Booth, head of research at $33 billion-in-assets
Ashmore Investment Management in London, was having lunch in
Munich last month with a large German institutional investor
who was crowing about changes he had made to his portfolio.
After years of hearing Booth preach about the need to
dramatically increase exposure to emerging-markets economies,
the investor excitedly announced that he had shifted his
conservative stance and doubled his allocation to 10
percent. Unimpressed, Booth deadpanned, So youre
still comfortable with 90 percent in the crash zone?
Many institutional investors are fundamentally
rethinking their approach to emerging markets. Attracted by the
powerful growth of economies in countries such as China, India
and Brazil, investors have been putting more of their money in
these markets. The debacle in Greece, concerns about the future
of the euro and worries about debt levels in developed
countries are providing more reasons for investors to shift
their weightings. Fund managers increasingly regard emerging
markets as a core part of their portfolios rather than a
high-risk sector that they can flit into and out of tactically
in an effort to boost yield, says Allan Conway, head of
emerging-markets equities at Schroder Investment Management.
The London-based fund manager has $24 billion of its $255
billion in assets in emerging markets.
As part of this shift, many investors are setting their own
allocation targets for emerging markets and using specialist
managers with extensive footprints in these regions to build up
positions, instead of leaving the job in the hands of
generalist global managers. Larger institutions are expanding
their direct presence in emerging markets while others are
using exchange-traded funds as a low-cost means of increasing
their exposure. Investors are diversifying within the
emerging-markets space, moving beyond basic equities to put
their money in fixed-income securities, private equity and
infrastructure investments. And theyre moving further
afield into frontier markets in places like Africa, seeking
higher returns. According to a survey of large, mostly U.S.
institutional investors published by Bank of America Merrill
Lynch late last year, emerging-markets equities are the most
desirable asset class, with 42 percent of respondents planning
to add to their positions over the next 12 months. By contrast,
39 percent said they were planning to reduce their exposure to
large-cap U.S. equities during the same period.
Yet for all of the recent changes, most U.S. and European
investors are still woefully underweight in their
emerging-markets holdings. People understand the emerging
markets are a big opportunity, says Richard Titherington,
CIO and head of the emerging-markets equity team at $1.2
trillion-in-assets JPMorgan Asset Management in London.
But the average pension fund thinks it is overweight at 5
percent. They need to dramatically rethink that and go to 20
percent. According to the BofA Merrill Lynch survey, U.S.
institutional investors allocations to emerging-markets
equities range from 2 to 15 percent and average between 3 and 5
percent. The $50.1 billion Virginia Retirement System has a
weighting of 5 percent, the $22.9 billion Connecticut
Retirement Plans and Trust Funds has 4 percent, and Boeing
Co.s $71 billion defined benefit plan has 2 percent.