Fund managers turn selective on emerging markets
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 returns.
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 themselves.
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 Beijing.
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 network.
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.
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