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© Copyright 2000 Rogers Media. The following article first appeared in the June 2000 edition of
BENEFITS CANADA magazine.
The global portfolio
Emerging markets present a world of opportunity. Money managers' strategies vary as much as the
countries they are investing in.
By Barbara Clapham
Emerging markets are different from developed markets. They are often more volatile and can be economically
and politically riskier than their mature counterparts. Liquidity is frequently a problem and emerging
markets are less efficient. That much is obvious. So why does anyone invest in emerging markets? Quite
simply, we expect them to emerge--to grow and develop.
While there are great return opportunities to be found in emerging markets, the challenge is to capture the
returns while managing the risk. One decision to be made is whether to invest in these countries on an
active or passive basis. Both styles have their supporters.
Steven Schoenfeld, head of emerging markets equity management at Barclays Global Investors in San
Francisco, thinks a passive-based investment strategy is ideally suited to these markets. Questioning the
wisdom of adding active manager risk to an already risky asset class, Schoenfeld advocates what he calls a
structured tiered, index-based strategy.
Schoenfeld's approach is essentially a passive strategy with a twist. It involves examining the structural
anomalies of specific countries--such as the size of the market, stage of development, transaction costs,
liquidity and operational risks, including capital controls--and assigning each country a score and rank
before assigning an appropriate tier and weight. Schoenfeld believes this method provides the advantage of
indexing while taking into consideration unique factors of emerging countries.
ACTIVE APPROACH
An active approach is preferred by Vincent Fernandez, assistant vice-president with Altamira Management
Ltd. in Toronto. Working with a top- down strategy, Fernandez first looks at the economic environment and
country potential, and then focuses in on sectors and individual securities within the selected countries.
One of the more interesting aspects of emerging markets, Fernandez says, is how certain governments are
supporting specific sectors. "If you look at what India's government has done to support the Indian
technology area, it has been phenomenal--low taxation, schools being set up in certain areas, allowing
companies to import computer hardware duty-free," he says.
Government backing led Fernandez to invest in India's technology sector at the beginning at 1998, when it
comprised only about 10% of the market. The sector outpaced the overall market by a massive amount,
standing at close to 50% at the end of 1999.
Although this type of strategy entails more overall volatility than a passive strategy, Fernandez points
out that this kind of opportunity can only be captured using active management.
Murray Johnstone International also uses an active, top-down approach, although risk management is a
primary consideration of its strategy. Euan Matheson, head of emerging markets for Murray Johnstone in
Glasgow, says that to avoid taking excessive risk he will only over- or underweight his firm's benchmark by
a maximum of 5%. For example, if Russia comprises 2% of the benchmark, Matheson will invest anywhere in the
range of 0% to 7% in the country. A 5% overweighting provides significant potential on the upside. "We
won't have 25% in the market, just in case we are wrong," he adds.
These managers all agree that investing in emerging markets is a worthwhile endeavor. However, the best way
to manage the volatility while taking advantage of the opportunities remains open to debate.
Barbara Clapham is a contributing editor with BENEFITS CANADA.
CONFERENCES
Canadian Securitization Conference
June 22, 2000
Le Royal Meridien
King Edward Hotel, Toronto
This one-day conference will provide information about important developments and trends in Canadian
securitization.
To register, call (888) 777-1707. In Toronto, call (416) 777-2020.
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