Developed markets are tapped out and saddled
with the biggest debt burden that theyve had since
1929, said Lee Partridge, CIO of Salient Partners, in
relation to developed markets.
With China, too, showing signs of slowdown, this makes
emerging markets a very powerful story, and
explains why investors are increasingly seeking growth in
previously untapped markets, according to Partridge.
But, as Donald Lindsey, CIO at George Washington University
pointed out, its important not to confuse growth
with profitability, as high GDP growth doesnt
necessarily imply high profitability and high equity
The complexity of navigating emerging markets can produce a
variety of views, even from Institutional
Investors award-winning Money Masters, who gathered
the morning after the award ceremony for a wide-ranging
roundtable discussion. (Our Money Masters also talked at
J.P. Morgan's trading losses.)
With Institutional Investor Editor Michael Peltz
and Senior Writer Frances Denmark steering the conversation,
Partridge and Lindsey were joined by Robert Manilla, CIO,
Kresge Foundation; Lawrence Schloss, CIO of the New York City
Employees Retirement System; and Sean Gissal, CIO at Marquette
What follows are excerpts of the portion of their discussion
related to emerging markets.
Lee Partridge: The whole idea of public
equity markets being the mainstay of a portfolio is a very
recent phenomenon. That is not how money has been invested for
thousands of years. That is a product of the 20th century and
one very loudly-spoken Wharton professor, who advertised that
stocks were the only way to get to the returns that you needed
as an investor. That simply isnt true. The reality is
this is definitely a tale of two cities. Seventeen percent of
the worlds population lives in developed markets. They
are tapped out. They have the biggest debt burden that
theyve had since 1929, and theyre going to be
working that off for a long period of time.
Robert Manilla: We think that there are
interesting opportunities in emerging markets, but the
opportunities are dramatically changing from four to five years
ago. Youre beginning to see different types of assets
become investible that werent investible a few years ago.
Since we have more emerging market exposure than just about any
foundation in the country, we tend to look at things from a
GDP-weighted benchmark, but we do that for growth assets, not
across the portfolio. We think for hedge funds, for example,
youd only do that if you think theres an
interesting idea in hedge funds, and thats a big chunk of
our portfolio. In the fixed income space, we dont
necessarily view that as the same opportunity set, because
theyre not as developed, so we dont split that one.
But all of our growth assets -- thats our benchmark --
are GDP-weighted around the world, as opposed to using the MSCI
World [Index]. Weve been doing that for six years
Larry Schloss: Can I ask one emerging
market question? When you look at emerging markets, is Nestle
an emerging market company?
Lee Partridge: It is. I think you have to
be aware of that. Because is PetroChina in an emerging market
country thats exporting principally to developed markets?
Thats a big question. I think the domicile of the country
versus the consumption base thats driving the growth of
that company are two different things, and you have to be very
aware of that.
Schloss: I would say its a more
efficient way to get to country markets.
Partridge: Small cap emerging is very
different it plays on emerging consumer demand
Donald Lindsey: I think there is a
difference between companies that derive a bulk of their
revenue and income in some emerging markets and companies that
are positioned in the emerging markets. What we try to do
within our portfolio is have regionally based managers. So our
Latin America manager is in Rio. We have Asian managers in
Singapore. There are a lot of factors cultural, social,
political. Consumer preferences vary dramatically from region
to region, even within countries. Depending on where you are,
consumer preferences can be very different. So having somebody
on the ground is important, but thats tough to do.
Its exponentially more difficult to find those managers,
but I think its the right way to go about it, as opposed
to having somebody in Boston or New York or Chicago managing
the emerging markets portfolio.
Manilla: Weve taken it one step
further, we dont even do regional. We just do country. So
theres a China guy, a Brazil guy, etcetera.
How do you decide where you want to be in emerging
Manilla: On the margin, wed rather be
in emerging markets than elsewhere, so thats step one. We
looked at the development of their capital markets, and it
naturally led you to China and Brazil before India, for
example. You can play Eastern Europe a little bit simpler,
there are other ways than actually having to find a manager in
some of those markets. So we start in China and Brazil and it
took us a long time to find good, active managers in India. I
think China was pretty easy. The typical modus operandi for a
Chinese manager was somebody born in China, educated in the
U.S., worked in the U.S. and then went back to China, and those
were the guys that we tended to find across asset classes that
have done well.
Are there places youre avoiding such as
Manilla: We used to play in Russia in the
public markets with a manager in Russia. We think theres
actually much better opportunities in the private markets in
Russia so we do some private stuff in Russia. The public
markets are not an interesting way to play Russia at all.
Lindsey: I think Russia is tough.
Theyre a resource play but given the structure and the
corruption and the legal system its difficult.
Manilla: The private market in China is
getting difficult because of the rising renminbi funds, so you
have to pull your head out of the sand. The guy investing
dollars in China today is at a huge disadvantage to the local
renminbi funds. You need to think through if you still want to
be a private investor in China.
Schloss: Id be very careful of
privates in emerging markets. You need a rule of law in private
assets. And you talk about liquidity: thats illiquid,
plain and simple. If you listen to private equity investors,
theyll all tell you horror stories about investing in
emerging markets. Because besides the political risk, I think
youve compounded the exit risk and the timing for this to
the point that if you add risk premiums for that youll
convince yourself not to invest there. By the time you get in
-- if its an emerging market it has booms and busts --
you cant get out: you missed it.
Lindsey: Right now I think public markets
are so attractively priced that its harder, particularly
in emerging markets, to identify the right premium that
justifies the greater risk. Im sure theres
opportunities out there but I just see the best opportunities
in the public markets. Weve looked recently and will
continue to look at Africa. The capital markets are small there
but theyre growing. And you also have a lot of African
multinationals that are listed on European exchanges, not
necessarily in exchanges within Africa.
Schloss: When you try to add the
illiquidity premium to it you price yourself out of local
private equity markets. The people who are in charge in the
emerging market country are playing an inside game that
youre not playing. You add a couple of risks, you add a
currency risk, you add a governmental risk, and before you know
it you could lose basis points of return and the market is
trading under that. So you lose bids all the time. I think
its very difficult.
When you invest in emerging markets, is that
primarily a growth story or in this kind of market are there
distressed opportunities as well that are equally
Sean Gissal: One of the things weve
done over the last couple of years is, as weve added to
emerging markets, weve tried to look at the world from
some of the variables that have been mentioned today such as
GDP being a key indicator. Weve tried to say we believe
that long term asset prices will go up. Where do we get that
portion? So we wanted to invest in emerging markets. But then
we also said to ourselves, Volatility isnt a good
thing. So for Marquette having to make its annual payout
and not wanting to reduce scholarships, how do we give
ourselves the smoothest ride? When we broke the world apart we
saw some of the debt ratios. The more debt that a country is
going to have, the more volatility that we would assume would
go along with that.