David Coombs, head of multi-manager investments at Rathbones, agrees that the problem for many managers is more on the investment side. He says that increasingly it is difficult to say that the risk premium for emerging market large cap makes it worth investing – for example, liquidity constraints push managers into large caps, where the performance is increasingly similar to global large caps domiciled elsewhere.
He says every global equity fund manager is also buying emerging market mega-cap stocks such as China Telecom, Vale in Brazil and Reliance in India. “Asset allocation in large caps is increasingly irrelevant. They all have international earnings and are so big it is difficult to generate excess returns.”
He’s been looking at Asean, Frontier market and other emerging market small-cap funds. He is also looking at local smaller-cap managers. He also invests increasingly through investment trusts for emerging markets exposure and is putting pressure on fund management groups to launch more.
This is a common theme. Mr Rock says that investing through investment trusts offers a viable alternative for investors still interested in getting exposure to soft-closed managers: “The discount on the Aberdeen investment trust might reduce as a result of the soft closure.”
There are funds with good performance that are not subject to liquidity constraints. Mr Rock points to the newly launched Fidelity FAST Emerging Market fund. It is likely to close at £1bn, but at only £200m, it has some way to go.
With many emerging market funds topping the billion mark, more soft closures must look like a risk. Liquidity is undoubtedly a problem in emerging markets, but is being managed by fund groups and may improve as capital markets develop in these countries.
Cherry Reynard is a freelance journalist
