The number of global emerging market (GEM) equity funds is set to increase in Australia, according to Standard and Poor’s inaugural review of the international equities emerging markets sector.
The review of 14 global equities managers, offering a total of 38 funds, based its forecast on strong recent market returns in emerging markets potentially sparking Australian investor appetite.
A key finding was that GEM equity markets have enjoyed a “meteoric rise in performance over the past two-and-a-half years, increasing by more than 140 per cent and significantly outperforming the developed markets in the process.
Another key finding was that the structural inefficiencies of emerging markets — being less developed, less liquid, and less researched — provide an environment for active managers to add value in this sector.
None of the 14 managers in the review, which incorporated three review peer groups — global emerging markets, Asia ex-Japan, and China — were awarded a five-star rating by S&P.
This reflected the relatively small number of managers and the relative inexperience of some of the portfolio managers in this sector, the review said.
“Overall, the sector has not produced what S&P considers are the highest quality managers,” it said.
Another key review finding was that the GEM sector does not offer a high level of diversification of returns, due to the high correlation of the returns of the emerging markets and the broader developed market over the past 15 years.
Despite this, S&P said, longer-term performance suggests emerging market exposure can be a good potential source of alpha.
S&P also found that management fees for the GEM emerging markets sector was higher than those in the mainstream international equities sector.
However, it said “these are justified by the higher transaction costs of smaller trading volumes for emerging markets, the lack of scale in the funds under management and the potential for higher alpha”.
Most managers in this sector review are either style-neutral or growth at a reasonable price (GARP), which S&P said indicates that style may not be a critical source of value adding in this sector.
Meanwhile, Allianz Global Investors yesterday officially launched a retail version of the Nicholas-Applegate Global Select Fund in Australia, currently offering a maximum 20 per cent asset allocation to GEM emerging markets.
The fund will operate in Australia as a separate vehicle to the manager’s wholesale Global Select Fund, but with the same bottom-up stock selection approach, according to portfolio manager Nick Melhuish.
He said the new fund will launch with about $60 million in FUM plus a $187 million FUM mandate it received in September last year.
