World Economy

EM Funds Seek Escape

EM Funds Seek EscapeEM Funds Seek Escape

Emerging market fund managers are seeking to escape from the straitjacket of traditional benchmark indexes in favor of a more flexible approach to capture the diverging performances of different countries and sectors.

The dilemma for such investors is illustrated by MSCI's widely used emerging equity benchmark. So far this year, this index is down more than 12%, mainly due to losses in big markets such as Brazil and China. Minor player Hungary, however, has gained some 30%, Reuters reported.

Similarly, in the debt market, Russian ruble bonds have returned 20% this year versus double-digit losses on the underlying emerging debt index which is driven by Brazil and South Africa.

Hence, asset managers are behind tempted towards treating each country on its own merits, moving away from traditional indexes or even dumping them altogether.

Columbia Threadneedle, for example, increasingly runs bond portfolios on a global 'go anywhere' basis, as boundaries between emerging and emerged economies have blurred.

"So it's not: 'I want this in emerging markets'–we just try to identify value where we find it," its chief investment officer, Mark Burgess, told the recent Reuters Global Investment Outlook Summit.

Even under the emerging markets umbrella, at least 14 multi-asset and 'blended' EM funds have been launched in Europe since 2013 in response to calls for more flexibility, according to Lipper, a Thomson Reuters information service.

These funds allow managers to invest across emerging equities, local and hard currency debt, and corporate debt to find the best returns. So shares in a Russian supermarket might sit cheek-by-jowl with dollar bonds from an Indian bank.