Global Investing

The people buying emerging markets

We’ve written (most recently here) about all the buying interest that emerging markets have been getting from once-conservative investors such as pension funds and central banks. Last year’s taper tantrum, caused by Fed hints about ending bond buying, did not apparently deter these investors . In fact, as mom-and-pop holders of mutual funds rushed for the exits,  there is some evidence pension and sovereign  wealth  funds actually upped emerging allocations, say fund managers. And requests-for-proposals (RFPs) from these deep-pocketed investors are still flooding in,  says Peter Marber, head of emerging market investments at Loomis Sayles.

The reasoning is yield, of course, but also recognition that there is a whole new investable universe out there, Marber says:

There has been so much yield compression that to get the returns investors are accustomed to, they have to either go down in credit quality or look overseas. Investors have been globalizing their equity portfolios for 25 years but the bond portfolios still have a home bias. We are starting to see more and more institutional investors gain exposure to emerging markets, and a large number of recent RFPs highlight more sophisticated mandates than a decade ago.

The allocation swing has been especially marked since the 2008 crisis and subsequent Fed money printing that flattened yields across developed markets – the IMF estimated earlier this year that of the half trillion dollars that flowed to emerging bonds between 2010-2013, 80 percent came from big institutional investors.

Here is a chart provided by the Institute of International Finance that shows the stark contrast between retail and institutional investors’ emerging market holdings:

LIPPER-Toil triumphs over talent for ‘star’ fund managers

The tumult caused by Richard Buxton’s move from Schroders to Old Mutual in March highlighted the veneration of “star” fund managers, those select few who apparently rise above the crowd to shine their light upon adoring investors.

We don’t need to dwell on Buxton’s track record (annualised return on his UK Alpha Plus fund of 13.7 percent over 10 years), but combined with Mark Lyttleton’s departure from BlackRock – his own star rather faded of late – I am drawn to ponder the funds industry’s views of, and hunger for, stellar talent.

It is attractive, and reassuring even, to believe that the people running our money are blessed with some innate skill for playing the markets, but I recently had to re-consider my own views on natural talent when talking to Matthew Syed, now a journalist and author, but previously England’s number 1 table tennis player for a decade. A competitor at two Olympic Games and winner of three Commonwealth Gold medals, Syed has some experience of being praised for his apparent natural ability.

Making an Impact may be new good

If the pure pursuit of greed is no longer good in the post-crisis world, what defines the new “good”?

That’s when you start to consider “Impact Investing”, a type of investment that pursues measurable social and environmental impacts alongside a financial return.  According to a report prepared for the Rockefeller Foundation, approximately 2,200 impact investments worth $4.4 billion were made in 2011.

But those who may be ideally placed to pursue Impact Investing are still largely absent from the exercise — sovereign wealth funds from the Persian Gulf, according to a recent paper published by academics at the Fletcher School at Tufts University.

Crisis? What crisis? Global funds grow stronger

Global funds are having a good year.

According to a report by financial services lobby TheCityUK, pension funds,  insurance funds and  mutual funds are on track to finish the year with $21 trillion more of assets under management than when they hit rock bottom in 2008 with the Lehmann collapse.

They are growing for the fourth year in a row, and much more so than last year, thanks to the recovery in equity markets.

All together, the London lobby forecasts these funds will end the year with about $85.2 trillion of assets under managements globally, $5.4 trillion more than last year, while 2011 ended “only” $1 trillion higher than 2010.

INVESTMENT FOCUS-Bond-heavy overseas funds want Obama win

Overseas investors, many of whom are creditors to the highly-indebted U.S. government, reckon a re-election of President Barack Obama would be best for world markets even if U.S. counterparts say otherwise.

For the second month in a row, Reuters’ monthly survey of top fund managers around the world was evenly split when asked whether a win for incumbent Democrat Obama or Republican hopeful Mitt Romney in the Nov. 6 presidential poll would be good for global markets.

The split was clearly dependant on whether the asset manager was based in the United States or not. Domestic funds, by and large, tend to favour Romney; overseas investors Obama.

Big Fish, Small Pond?

It’s the scenario that Bank of England economist Andrew Haldane last year termed the Big Fish Small Pond problem — the prospect of rising global investor allocations swamping the relatively small emerging markets asset class.

But as of now, the picture is better described as a Small Fish in a Big Pond, Morgan Stanley says in a recent study, because emerging markets still receive a tiny share of asset allocations from the giant investment funds in the developed world.

These currently stand at under 10% of diversified portfolios from G4 countries even though emerging markets make up almost a fifth of the market capitalisation of world equity and debt capital markets.  In the case of Japan, just 4% of cross-border investments are in emerging markets, MS estimates.

State vs entrepreneurial capitalism

The post-crisis world has been in part shaped by the growing presence of sovereign wealth funds, which have become an important source of funding with their $4 trillion assets, replacing private equity and hedge funds. But some people are wondering whether state capitalism really is the way forward, to boost the potential growth rate of the post-crisis world.

Robert Litan, senior fellow at the Brookings Institution, believes that in fact it’s entrepreneurs who would play a key role, and it’s important for policymakers to come up with a mechanism to help them.

Litan estimates that the United States needs 30-60 new “home-run” firms a year with annual sales of $1 billion to boost U.S. growth rate by one percentage point beyond its post-war average of 3 percent. This is double the past 150-year average of 15 firms a year.

How socially responsible is your investing?

Is your investment ethically sound and socially responsible?

A new survey by consulting firm Mercer finds that only 9% of more than 5,000 investment strategies achieve the highest environmental, social and governance (ESG) ratings.

Socially responsible investing (SRI) involves buying shares in companies that manage ESG risks. For example, firms that make clean technologies are favoured, while businesses which pollute the environment, are complicit in human rights abuses or nuclear arms production are shunned. All this sounds good, but the performance of such investments has been somewhat mixed — meaning being good doesn’t always mean doing well. But the SRI industry is hoping that greater involvement of funds, especially long-term ones such as pension funds and sovereign wealth funds — may generate flows into the sector and lead to better performance.

Of the 5,175 strategies assigned ESG ratings, 57% are in listed equities, 20% fixed income and the remaining 23% across real estate, private equity, hedge funds and others.

Irish SWF: Died Nov 2010 aged 9

National Pensions Reserve Fund, born April 2001, died November 28th, 2010; survived by a sister, Nama.

 Irish Times wrote today an obituary for Ireland’s sovereign wealth fund NPRF, which was originally set up at the start of the last decade to plug future pension shortfalls.

 AUSTRIA/

But it never lived to fill this purpose. The 25-billion euro NPRF, which boasts its membership to the world’s elite SWF club, has died a sudden death although it has been suffering a capital haemorrhage last year, when the government amended the rule and used 7 billion euros to recapitalise its battered banks. The grim fate of NPRF also raised concerns about the viability of long-term capital: after all, sovereign wealth funds were billed as a provider of global financial stability as they invest in risky assets in the long-term.

State funds and environmental investing

An Australian local government superannuation fund has become the latest state-owned fund to invest in environmental funds.

Local Government Super (LGS), which manages around A$6 billion in assets for 100,000 local government employees in New South Wales,  has invested A$50 million ($45.96 million) into a portfolio which invests in small cap environmental technology stocks, run by London-based Impax Asset Management.

The portfolio will follow an investment strategy followed by one of Impax’s fund, which returned 47.71 percent in the last five years, versus 20.10 percent for the benchmark MSCI World Index.