Investors: A Growing Taste For Exotic Fare
Investors: A Growing Taste For Exotic Fare
Even conservative investors are tempted by the returns of emerging-market funds
For many managers of emerging-market funds, the biggest problem these days is that folks just love them too much. It used to be that buying stocks in Turkey and picking up distressed debt in Argentina was for hedge fund dynamos and other investors with cast-iron stomachs. But now the fat returns offered by emerging-market equity — and five years of crisis-free developing markets — are luring the kind of conservative investors who have traditionally stuck with U.S. bonds and blue chip stocks. The best proof of a shift: Pension funds are pouring capital into emerging-market funds. “All of a sudden, emerging markets are not the exception but the rule,” says Chuck McKenzie, chief executive of OFI Institutional Asset Management, a division of Boston-based Oppenheimer Funds Inc.
Just how juicy are the returns overseas? The Morgan Stanley Capital International ((MWD ) (MSCI) Emerging Markets Index clocked double-digit gains for the past two years in a row — the first such spurt since the early 1990s. So far this year, the MSCI index of developing economies’ equity markets is up 19.05% in dollar terms, which beats both the 3.96% gain in MSCI’s developed international markets index and a 1.59% rise in the Standard & Poor’s 500-stock index. Many pension fund managers find those numbers too tempting to resist. “Lots of pension funds are overweight,” notes Christopher D. Alderson, Baltimore-based T. Rowe Price International’s (TROW ) portfolio manager and head of emerging markets in London.
The pile-on worries other institutional investors, who say many underdeveloped equity markets — like those in, say, Brazil and India — are overdue for a correction. The skeptics point to the influx of slow-moving pension money as a signal to cut their allocations. But despite high valuations, many pension managers are drawn to emerging markets because of a dearth of attractive investment options at home. While U.S. interest rates are rising, they are still low by historical standards and have failed to give fixed-income investors much bang for their buck. Stock markets in developed economies such as the U.S. are grinding out single-digit gains at best. At the same time, projected pension liabilities are mounting, a reflection of both today’s low-return environment and demographic trends.
It all adds up to a tough climate for pension fund managers — and a big motivation to make up shortfalls by investing farther afield. “There’s a willingness to take risks in order to get returns,” says Bill Riegel, global head of active equity portfolio management at retirement fund manager TIAA-CREF. That attitude has helped push up emerging-market allocations from pension funds, foundations, and endowments from 9.67% of their total assets under management in 1995 to a record 16.2% — or $1 trillion — last year, according to State Street Corp. (STT ) research unit InterSec.
So far, the bet has paid off. The last major collapse affecting emerging markets dates back five years or more to the Asian financial crisis of 1997, the Russian debt crisis of 1998, and the Brazilian currency crisis of 1999. Since then, many developing economies have instituted reforms to keep fiscal spending in check, built up foreign reserves to protect their currencies, and improved corporate governance. The runup in global commodities prices has also helped reduce volatility and sustain stock rallies. “Emerging markets are becoming more stable than they have been historically,” says Alistair Lowe, director of global asset allocation at State Street Global Advisors. “The fear of the unknown is gradually declining.”
Yet that is precisely what makes some fund managers nervous. Some of TIAA-CREF’s Asia-focused portfolio managers, for example, have started to rotate out of emerging markets as U.S. interest rates creep higher. Even if economic fundamentals remain firm, these markets may have risen too fast to be justified by earnings. “We’ve had two very strong back-to-back years [of high returns],” notes Alderson. “I don’t think we’ll have as strong a third year.”
If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
To receive our free newsletter, contact us here.
Subscribe our YouTube Channel for more updates.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
GROCO.com is a proud sponsor of The American Dreams Show.
The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business. Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most. They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges. Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
Nick Sonnenberg, Founder of Leverage Leveraging Your Business Operations About Nick Sonnenberg Nick Sonnenberg is the founder and CEO of Leverage, a business efficiency consultant, columnist and author of the upcoming book, Come Up For Air: How Teams Can Leverage Systems and Tools to Stop Drowning in Work. Nick’s mission is to create companies…
The New Bull Market This article is adapted from an exclusive interview with Robert Zuccaro, CIO of Golden Eagle Strategies, in August 2022. Question: Right now, there are a lot of people scared saying that we’re on the brink of a recession, but you say that we entered a new bull market at the…
Why Integrity is Key for Success in Business Integrity Means There are a few key reasons why integrity in business is so important for success in business: – Personal values such as integrity build trust with customers and clients. If you’re known for being trustworthy in your personal and professional life, people will want to…
Jim Kwik Unlocking Your Brain’s Limitless Potential Jim Kwik knows a thing or two about learning. After suffering a traumatic brain injury as a child, Jim was faced with many challenges. He was teased by classmates and referred to as “the boy with the broken brain.” But Jim didn’t let his injury hold him back.…