He meant it. "The weaknesses are in the developing world now, not emerging markets," Conway said in an interview with Financial Advisor. He says these countries aren't saddled with all the problems that developed countries have had since the financial crisis. He expects emerging markets to deliver real GDP of at least 4.5% this year.
In Schroders' SEMVX global emerging markets equity fund, Conway and his team are overweight in China, South Korea and Thailand and underweight in Mexico, India and Taiwan. The fund is neutral in Latin America and Brazil. He is also overweight in most of Russia, but underweight in Eastern Europe and South Africa. The fund also has holdings in Asia, Hungary, the Czech Republic, Poland, Egypt and Turkey. SEMVX was down 16.75% for one year but up 2.61% when averaged for five years. The fund's best year, 2009, ended with a gain of 76.86%. In 2008, it was down 51%. Definitely not for the faint of heart.
Because of the euro's woes, some managers are opting for debt funds denominated in local currencies. "It's a newer asset class," says Kristin Ceva, a managing principal at Payden & Rygel, and a manager on its Payden Emerging Markets Local Bond Fund (PYELX), launched in November 2011. "Some clients wanted 100% local currency," says Ceva, who also directs the firm's global sovereign debt strategies. "They wanted to diversify away from [the] dollar or other currencies." Ceva finds it improves inflows. "Investment flows tend to support currencies of those countries," she says.
One of Van Eck's Market Vector funds, the emerging market local currency bond fund (EMLC), also diversifies away from the U.S. dollar. With 72% of the fund in government bonds, 15.56% in corporates and 5% in government-sponsored development banks, EMLC strives to improve on the returns of the emerging markets global core index of the J.P. Morgan Government Bond Index, says Edward Lopez, Van Eck's market director for ETFs. In just over a year, the fund has acquired $26 million in assets under management. Its largest competitor is WisdomTree's emerging markets local debt fund (ELD), an actively managed ETF launched in August 2010 (a month after Van Eck's EMLC) that has a similar one-year return: 5.72% versus the EMLC fund's 5.76%. Lopez is also responsible for rebalancing the Van Eck ETF, whose 0.48% expense ratio is slightly lower than WisdomTree's 0.55%. ELD is more heavily weighted in Russia, Chile and Brazil. The EMLC fund's largest weightings are in Chile, South Africa, Russia and Malaysia.
The first half of 2010 saw declines in some local currency bond funds, recalls Lopez. "Some active managers were out. You have to know when to get back in." Van Eck maintained its index positions. When the managers rebalanced the portfolio to optimize the index, they were able to pick up bonds cheap, says Lopez, adding, "In some cases, [the] passive strategy affords the ability to get back in there faster."
Van Eck also has an equity emerging market fund (GBFAX) that benchmarks the MSCI-EM Index. "We like to follow domestic demand, which has seen rapid growth from consumers and service-based industries," says David Semple, the firm's director of international investment. Semple has noted more quality product output in the emerging market thanks to automation. There is also more stability in these countries' democracies, he says. According to Semple, the fund has benefited from the hard asset research the firm does for its Global Hard Assets Fund (GHAAX), which invests in energy, precious and base metals, timber and agriculture. "We feel more comfortable investing, in collaboration with our colleagues, where there's a significant natural resource-based advantage," such as in Africa, Kazakhstan and Argentina, he says.
In the case of BlackRock, the world's largest asset manager, diversification takes on a whole new meaning. Jeff Shen, the portfolio manager for the groundbreaking BlackRock Emerging Markets Long/Short Equity Fund (BLSAX), says his is the first emerging market hedge fund holding both long and short equity positions that is offered to retail clients. It's also unique in that it holds 600 names. "We take diversifying seriously," Shen says, "[with] many small bets across many names. Investors today need to take a far more 'granular' approach to the sector than they have in the past. We don't swing for the fences on a few names and hope it works out."
He's also very cognizant of managing risk. "Emerging markets can rise and drop 10% in a few weeks," he notes. BlackRock's massive holdings have enabled it to acquire vast data stores on market activity and securities. Add to this its stable of number-crunching quants. "We have a very robust risk model," he says.
For Shen's new fund, all 600 securities are put through the Sharpe ratio-adjusted, proprietary BlackRock risk model and aggregated through the portfolio to reach a risk number. Shen tries for a risk target of an 8%-15% overall fund volatility.
The firm is trying to do things differently from other people, says Shen, by focusing on individual, fundamental securities data. "You delve into infrastructure and resources. The process itself requires BlackRock's benefits of scale to cover 22-plus emerging markets," he says. It's important to be able to short in emerging markets, he adds, but difficult sometimes to borrow stocks. "Working with some of the largest counterparties in the world requires technology and numerous counterparty relationships," he says, and a separate dedicated team manages counterparty risk at BlackRock.