By Manuela Badawy
NEW YORK, June 11 (Reuters) - The investor love affair with
emerging markets may be gone, but several money managers aren't
completely abandoning the sector.
Fund managers who viewed emerging markets as a single
investment category now need to go through extreme due diligence
to select each asset, sector or country in order to attain
Factors that fueled the emerging market rally like Chinese
economic growth and quantitative easing in developed countries
are now easing off. That has left emerging economies to fend for
The benchmark MSCI emerging market index is down 10
percent this year. It has fallen on fears the Federal Reserve
will pull-back on easy monetary policies, concerns about rising
bond yields and weakness in commodity prices. Overall, the
widely tracked index is down 20 percent since May 2011, a
decline often associated with a bear market.
"Emerging markets are not a safe haven anymore," said Sergio
Trigo Paz, managing director and head of emerging markets
fixed-income at BlackRock.
It's quite a reversal of fortune. From 2009 to 2011,
emerging markets were the darlings of the financial world.
Global investors pursued higher returns in countries like China
and Brazil that displayed strong growth as developed world
economies remained nearly stagnant.
The MSCI posted returns of 133 percent during the period
between January 2009 and January 2011, compared to a 42 percent
gain for the S&P 500.
Since 2011, Brazil's economy has cooled sharply, partially
due to an economic slowdown in China.
The large amount of liquidity in emerging markets is not
there anymore. This offers a buying opportunity for specific
emerging market assets with strong fundamentals.
Fund managers are faced with the challenge of creating a
multi-asset approach with micro analysis of each and every
asset. They all caution that it is no longer possible to simply
throw money at emerging market funds.
Jason Ader, chief executive officer and chief investment
officer at Ader Investment Management, has large real estate and
hospitality investments in Macau. The Chinese territory is
heavily dependent on gambling and tourism and Ader expects it to
be a big revenue producer for his investments.
"Our biggest focus continues to be Macau because of the
gaming and the hotels," said Ader, whose firm largely manages
money for his family and a small group of investors.
Ader is also looking to buy distressed or soon-to- become
distressed areas in real estate in grater Shanghai and greater
Michael Underhill, founder and chief investment officer at
Capital Innovations LLC, with $145 million in assets, also sees
China as the best example of an emerging market nation where
specific sectors look attractive.
He sees investments in infrastructure, food and agriculture
as a good return potential given the need to transport and feed
1.3 billion Chinese. Last month, Shuanghui International
Holdings, also known as Shineway Group and the largest meat
producer in China, agreed to buy Virginia-based Smithfield Foods
Inc, the world's biggest hog producer, for $4.7 billion
in a move to feed a growing Chinese appetite for U.S. pork.
Some managers also still see opportunities in India and
Brazil, two other nations in the so-called BRIC group of Brazil,
Russia, India and China.
Michael Kass, portfolio manager of the Baron emerging market
fund, sees value in India's cable carriers and broadcasters. He
said cable carriers in India should benefit from a regulatory
mandate requiring cable TV providers to transition their
broadcasts from analog to digital.
"This will unleash a lot of investment by the cable industry
to drive broadband Internet penetration over the cable network,"
Kass said, adding that he is invested in cable carriers Den
Networks Ltd, and Hathway Cable & Datacom Ltd
The emerging market fund Kass manages, which has $22 million
in assets, is up more than 7 percent this year. He
said programming companies that are dominant in the broadcasting
end of the business will benefit most by having more digital
content ready to offer. Two companies that Kass said are poised
to benefit are Zee Entertainment Enterprise and Sun TV
Kass is also targeting investment dollars to educational
firms in Brazil. He believes the country's growing and
relatively young middle class will demand education to prepare
themselves for new jobs as the economy diversifies. Kroton
Educacional, Anhanguera Educacional and
Estacio Universities < ESTC3.SA> are best positioned to benefit
from the demand for additional job skills and training, he said.