“Total assets for emerging market investment funds worldwide might grow from $4 trillion today to over $10 trillion by 2020, combining fast growth with greater exposure to EM in global and international portfolios, diversified emerging market products, and specific regional and country products,” said Daniel Enskat, senior adviser to Strategic Insight and Asset International, Inc.
Avi Nachmany, Strategic Insight’s research director, noted that “half of all stock fund flows in the U.S. since 2007 were deposited in EM equity funds and ETFs. In the six years before, the share of EM equity investments was just 10%. While recent months reminded many of the short-term risks of EM investing, the unstoppable aspirations of billions of hard working emerging consumers, and the inevitable wealth creation from such a trend, support the trajectory of further expansion of EM investing for the long term.”
Historically, emerging market equities were the most successful and visible component of emerging markets, but in recent years, local currency and emerging market debt products have helped build a broader universe.
As the industry is converging, Strategic Insight also sees a trend of more dedicated emerging market solutions for institutions and retail investors, along with private equity emerging market offerings from both alternative and traditional fund managers.
According to Strategic Insight, market cap indices are concentrating risks, and managers are trying to redefine the landscape from developed to emerging, horizon, frontier, and formerly developed markets. Understanding the various country, credit, macro, demographic, and political risks to produce less volatile long-term returns will change how the industry invests in emerging markets.
Much of this change will be led by sophisticated institutional investors that create direct investments, JVs, and specific projects in emerging markets for the long term, with a trickle-down effect to other institutions and high net worth (HNW) investors. And retail investors have become more aggressive as well, albeit in different forms. Investors in Latin America or Asia are investing in other emerging markets to get better returns and reduce concentration risks. European and U.S. investors now for the first time go deeper into specific emerging markets, away from just broad global or international exposures.
Enskat said, “Looking at the market today, we see a handful of mega-sized ‘Goliath’ firms, and products with aggressive emerging market distribution and a broad product offering, such as BNY Mellon, HSBC, Franklin Templeton, and UBS. But more specialist firms are entering the Goliath asset realm, such as Aberdeen, Investec, Ashmore, and BTG Pactual. Lastly, smaller boutique firms with specific regional or country skills, including Matthews, Value Partners, Finisterre et al., have carved out a profitable niche, but they need to plan next steps. More will enter the fray as emerging markets enter the mainstream for retail investors all around the world.”