At face value, growth-oriented strategies would be a no-brainer for investors in Asian and Emerging Markets equities, but Morningstar research has warned that the answer is not so simple.
“Despite the growth-driven rationale often cited for investing in Asian equities and emerging markets, managers that target the fastest growing companies and ‘blue-sky’ stories have in fact lagged over time,” says Morningstar senior research analyst Mark Laidlaw.
Advisers should look out for equities managers that focus on sustainable firms that uphold strong governance standards, rather than those who simply jump onto the latest growth story and ride the wave of success.
If your clients want to look at another option of investing in emerging markets, Laidlaw has suggested that Emerging Market Debt (EMD) shares the same attractive characteristics of equities, such as long-term economic growth. Over the longer-term the sector has attained returns similar to emerging market equities but with a lower level of volatility.
EMD success is largely due to a greater proportion of currency reserves providing policymakers with more autonomy to manage their economy; which is great from a debtors perspective as they are well capitalised, according to Laidlaw. EMD also offers diversification due to the low correlation it enjoys with other asset classes.
When it comes to emerging market equities, Morningstar has recommended Lazard, Colonial First State and Platinum, who all share “a robust valuation discipline but also pay close attention to factors such as management and strategy execution and have tended to deliver across the long-term regardless of what investment style was in vogue”.
During its 2012 Asian and emerging markets sector review, Morningstar downgraded Platinum Asia – primarily due to some tweaking done by the shop in regards to the portfolio management responsibility of the fund – while AMP Capital Asia and Arrowstreet Emerging Markets received upgrades.
Fidelity Worldwide Investment has warned that the “free lunch” is over for investors in emerging markets. “Where an indiscriminate or passive approach worked in the past, it is unlikely to fare so well in the future,” the investment specialist said.
“Emerging markets will still grow faster than developed markets and should remain a source of attractive returns. However, there is likely to be far greater differentiation between markets, sectors and stocks. Active management of emerging market investments will be vital as country and stock fundamentals reassert themselves.”