Can emerging market funds be run from developed countries?
Emerging markets are clearly going to be the powerhouses of growth over the medium term.
Yet, cultures and practices are very different in places like China and Vietnam. But how important is culture when it comes to managing money? Can managers running emerging markets funds out of the UK, for example, really understand the stocks they invest in when they are sitting at a desk 5,000 miles away and visit the region only three or four times a year?
The backdrop
When Anthony Bolton announced his return to managing money last year, he said he would be running his China Special Situations fund from Hong Kong. He said: “I could not do it anywhere other than Hong Kong. I have always operated alongside our analysis and fund managers. For me, it has been really important to have that backdrop. Others may have a point it is good to be a bit detached at times, but my perspective of managing money in the West should make me somewhat detached anyway.”
However, First State’s Jonathan Asante runs his group’s emerging markets funds from Edinburgh.
He says: “There are advantages of being away from the noise of emerging markets. We invest with a three- to five-year view so it is good to stand back and have distance and see the wood through the trees.”
He has team members in local offices in Hong Kong and Singapore and says the group’s “very defined” way of investing means it is valuable to have a local presence in Asia.
“Our business is based on company meetings so being in the region means you can have the maximum number of meetings.”
He thinks this mixed approach is the best strategy. First State does not have local offices in Latin America – Asante says this is because the investable universe is not as big.
“In Asia there are so many more companies to invest in – it is much more bottom up. That just means a lot of travel to Latin America.”
Is location key?
Asante believes the location of the manager should not be an adviser’s priority. “If I was looking at a fund I would be more concerned with the people and culture than where they were operating from,” he says.
“I would be more interested in seeing how they operate under stress. Where they are based would not be as important. I am more interested in the team, culture and that they do what they say they do.”
Andrzej Blachut, head of emerging market equities at Swiss & Global Asset Management, runs the Julius Baer Central Europe fund from Switzerland. A Polish national, he previously ran money for the AIG Pension Fund in Poland and says there are advantages to being based in the local market.
He says: “Access to companies was much better when I was based in Poland. Meeting people, visiting companies and visiting sites was all routine for me. You can talk to competitors to really get to know the business from another side.”
Blachut adds that being local means you have better insight into small caps. “From Switzerland I cannot check if companies are really as successful as they say they are. I can only believe the management.”
As a result, since moving to Switzerland, he has shifted from investing in micro caps to mid caps. Despite the negatives, he says there are advantages to being based away from the market you invest in.
“When I was in Poland, I tended to invest more money into Polish equities versus other equities. I was skewed towards the Polish market because I felt I knew the Polish market much better than, say, the Hungarian market,” he says.
“If you look at portfolios of managers in China or India, they are usually overweight the country where they are based.
“An advantage of moving to Switzerland is I can now take a more neutral view. I can check how the macro data looks. Locally, you are bogged down with data everyday and the domestic data usually overtakes international data because you are so close to it. Here, I can take a more neutral view of what is going on in Poland.”
But Dominic Scriven, managing director of Dragon Capital, a fund management house in Vietnam, says having locally based managers is crucial.
“For a relatively immature but rapidly growing economy like Vietnam, relationships and a deep understanding of the market and the companies that comprise it are crucial.”
Peerless local knowledge
Dragon Capital has forged major relationships over time and often takes seats on boards of the companies they invest in. They have built up peerless local knowledge, according to Scriven.
He says: “Outperformance will come from closely aligning investments with the underlying economic growth drivers and these are best understood through first-hand experience.
“In Vietnam, those growth drivers are predominantly in the domestic sector. We are accumulating assets that correlate with income growth and the development of a middle class, demographics and urbanisation, financial-sector modernisation and export infrastructure build-up.”
The firm has a large UK, European and US investor base so Scriven admits there can be logistical issues caused by time differences. But he says they have operations in their major investor locations globally to mitigate this, and they also run regular investor roadshows headed by their management team based in Vietnam.
He believes advisers need to consider fund manager location very carefully when picking funds for their portfolios.
“In a market undergoing such rapid development as Vietnam, we regard fund manager location as a paramount concern for investors outside of Asia looking to generate returns from the upside offered by Vietnam,” he says.
However, Dan Kemp, a partner at Saltus, says depending on the fund type, there is an argument for running emerging market funds from afar.
He says: “Many emerging market funds are often noisy – there is a massive amount of activity including IPOs and hot stocks. In some ways, it is better to be away from the market to take a longer-term perspective and not get caught up in market noise. A lot of what you are looking for is long-term winners rather than the next stock to go up 10%.”
He thinks investors in the UK can benefit from having a UK-based manager – they can have better access to the manager and have a better idea of what the manager is doing with their capital.
However, Kemp says experience and proven skill is the first thing investors should look for in a manager when it comes to emerging markets.
He says: “As markets are typically less transparent and less liquid, it is essential to have access to the culture. But you need great team members on the ground.
“Anthony Bolton does not necessarily tick all the boxes. He is relatively new to investing in China but he has always relied on Fidelity’s bank of analysts. If the manager is based in the UK, it does not make a difference provided there are people on the ground or they are visiting the region regularly.”
Meanwhile, Anthony John, CEO of Fundquest, says fundamentally investors should consider managers’ capabilities over where they are based. But, he says, typically in new emerging markets, you find quality managers coming out of large, local institutions such as banks, and setting up their own boutiques.
Choosing a manager with a good track record and proven experience is essential for advisers when it comes to picking funds. But this mantra should apply to all sectors, not just emerging markets.
When it comes to investing in immature, developing countries, investors would surely feel safer with the knowledge the manager has not just spoken to the company but seen it, investigated it and understood its culture and potential.
What the managers say
“I have always operated alongside our analysis and fund managers. For me, it has been really important to have that backdrop”
Anthony Bolton, Fidelity
“There are advantages of being away from the noise of emerging markets”
Jonathan Asante, First State
“Access to companies was much better when I was based in Poland. Meeting people, visiting companies and visiting sites was all routine ”
Andrzej Blachut, Swiss & Global Asset Management
“In a market undergoing such rapid development as Vietnam, we would regard fund manager location as a paramount concern ”
Dominic Scriven, Dragon Capital
“It is essential to have access to the culture. But you need great team members on the ground”
Dan Kemp, Saltus
