Emerging markets are developing increasing depth and complexity, suggesting that the usual investor view of lumping the “BRICs” together is too simplistic, say fund managers.
Investec Asset Management, a regional expert given its South African roots, is offering two emerging market debt funds holding paper which would never have been considered previously. The Investec GSF Emerging Markets Local Currency Dynamic Debt Fund will exploit opportunities across 23 liquid local currency debt markets, while the GSF Emerging Markets Currency Fund aims to benefit from long-term emerging market currency appreciation across 36 markets. Both are Luxembourg-domiciled.
After the success of its multi-strategy Africa and Middle East Fund - which has returned 36% since launch in June 2008 - London-based Insparo Asset Management has a new vehicle set to tap the huge growth potential of African businesses and the growing power of the continent's consumers. The new fund launched with initial seed capital of $7.5m, raised through internal and external investors, and will be soft-closed at $250m.
Manager Jamie Allsopp says: "The rapid rise in consumerism and urbanisation in Africa, coupled with widespread political reform and its overall growth outlook, make it a highly attractive investment prospect."
Exposure to South African equities is limited to 20% of the portfolio, a restriction which perhaps reflects the growing choice of substantial stocks elsewhere on the continent. The growth potential of Africa means that the Insparo Africa Equity Fund is anticipated to make average unleveraged annual returns of 15-20%.
More complex and sophisticated emerging market fund structures, and niche themes, are also more evident.
Investors allocated more than $500m in net new inflows to emerging market hedge funds in 4Q10, the largest quarterly inflow since 2Q08, reversing the trend of capital redemptions and investor risk aversion that had characterised the last nine quarters. Total capital invested in the sector peaked at more than $116bn in 2007, before drawing down to a post-financial crisis low of $66bn in 1Q09.
There are now also more than 140 emerging market hedge funds that are Ucits III-compliant.
Data from Hedge Fund Research shows emerging markets hedge funds posted industry-leading gains in 2010, led by funds with regional exposure to Russia and the Middle East. As a direct result, assets invested in emerging market hedge funds increased by nearly $10bn in Q4 to end the year at more than $114bn, approaching the record level of assets under management for emerging market hedge funds, set in 2007.
The HFRI Emerging Markets (Total) Index gained 11.79% for 2010, topping the gain of 10.30% for the HFRI Fund Weighted Composite Index, the leading benchmark of global hedge fund industry performance. Emerging market sector performance in 2010 follows gains of more than 40% in 2009, and is particularly significant considering the volatility which characterised 2010.
Another way to play emerging markets is via their increasing interest in luxury goods. The view that developing economies are of interest primarily for commodities or basic consumption is outdated, says Scilla Huang Sun, head of equities at Swiss & Global Asset Management, who also manages the Julius Baer Luxury Brands fund.
Born in Italy and raised in Switzerland by Taiwanese parents, Huang Sun realised early on that luxury demand would be as strong in emerging markets as in developed markets. She says Asia remains the fastest growing region for luxury goods sales. These are focused on at the moment, but she expects Asian luxury brands to quickly challenge the established names.
Newly-wealthy entrepreneurs want to demonstrate their success. According to some estimates, consumers in greater China are likely to account for 44% of global luxury brand sales by 2020. Luxury goods companies are expanding rapidly there, where the prices of expensive items such as fine wines have jumped 40%. Greater China consumers account for 15% of global luxury goods sales.
The news that China had overtaken Japan as one of the world's largest economies has flagged the rapid evolution of what were ‘emerging' markets. Such growth brings increasing complexity, but also, for those investors prepared to take time to understand them, even greater opportunities.