GDP growth a red herring for emerging market investors
While emerging markets have outpaced growth in developed markets for the past decade, economic growth does not always translate into equity returns, according to Lazard Asset Management’s Jai Jacob.
By Jenna Voigt, Features editor
Tuesday October 16, 2012
Jacob, who manages the $21m Lazard Emerging Markets Allocation fund, says he expects GDP in emerging markets to continue to grow at a faster rate than developed economies, but warns investors cannot guarantee equity returns on economic growth.
“It’s important to separate the economic story from the market story,” he said. “It is true [emerging markets are growing faster] by virtue of having a lower starting point. But a country exhibiting a high growth rate doesn’t necessarily mean it will have a higher rate of equity return.”
Over the 10 year period, the MSCI Emerging Markets index has tripled the returns of both the US blue-chip S&P 500 index and London’s FTSE 100; returning 299.89 per cent over the term, compared with 63.42 per cent and 101.74 per cent respectively.
Performance of indices over 5yrs
Source: FE Analytics
However, the manager says it is important to take a bottom-up approach to investing in the fast-growing sector and points out countries such as India are faced with political and economic factors which will affect levels of growth.
Jacob says that while his primary focus is taking a conservative approach to emerging markets, he feels investors are missing out on potential gains that are hard to come by in more developed economies.
Jacob says investors are currently underexposed to emerging markets, typically holding roughly 5 per cent of their investments in the rapidly growing sector, when they should be holding 15 to 20 per cent to be “market neutral”.
“A lot of investors have been scared of fully moving into the asset class because of a higher level of volatility,” he said.
The manager says the aim of his multi-asset fund is to give investors an entry point into the emerging market growth story while keeping volatility roughly 10 per cent lower than the market.
The fund, which launched in October last year, has outperformed the FSA Offshore Recognised FO Mixed Asset - Flexible universe over the one year period, returning 4.31 per cent over the term, compared with a sector average of 1.84 per cent.
However, it has lagged the MSCI Emerging Markets index and IMA Global Emerging Markets sector average.
Performance of fund versus sectors since launch
Source: FE Analytics
Jacob says in order to dampen volatility in the portfolio it is important to look at the entire investment sphere, including equities, bonds and currency.
“Our most powerful asset is the fact that we’re investing across the capital structure. We tend to have lower volatility by mixing equities and debt and believe we can keep up with the equity market at a lower level of volatility,” he said.
The manager is currently holding 58 per cent of the fund in growth-oriented equities to take advantage of emerging economies where growth is essential, such as China and Russia.
“We have a very optimistic outlook compared with six months ago,” he said.
The remainder of the fund is invested in fixed income holdings, with 25 per cent in debt and 17 per cent in currency.
According to recent FE Trustnet research, the $351m Invesco Emerging Markets Bond fund was the only fund in the IMA Global Bond sector to deliver top-quartile performance over the two consecutive five-year periods since 2002, making it the most consistent fund in the sector over the past decade in spite of investing in what is traditionally considered a more volatile asset class.