December-January 2012

FUND LAUNCHES: The rise of emerging markets

ChinaForget Europe and North America, our latest survey of fund launches reveals a remarkable turn-around for the likes of China and Brazil, writes George Mitton. In the six months ending 30 September, there were more funds launched that focus on emerging markets than any other region, the latest survery by Funds Europe shows. This is a dramatic change from the last time we ran the survey, when we looked at funds launched in the nine months ending 31 March. Then, the greatest appetite was for global funds, which accounted for more than 40% of all fund launches. Emerging markets came a distant second. Now, emerging market products account for more than a third, 22, of the new funds in our survey, pushing global funds into second place. This is an important shift. Funds that were once an adventurous investment have become mainstream. The emerging markets have come of age. Analysing the data
Fourteen of the funds in our survey gave their principle geography of investment broadly as emerging markets and a further eight said they specifically invest in countries or regions within the emerging markets. There were four Asia-Pacific funds, two from Allianz Global Investors and two from UBS Global Asset Management. Allianz is betting on the appreciation of the Chinese currency with the Allianz RCM Renminbi Fixed Income fund, while its other Asia-Pacific product is aiming for small cap Asian equities. Meanwhile, UBS had an Asian Sicav fund that seeks high dividend-paying stocks and an exchange traded fund that tracks MSCI’s Pacific Socially Responsible index. There were four country-specific funds. Nordea Investment Funds launched two Poland funds, one investing in equities and the other in bonds. Schroders launched a Brazilian equity fund and UBS launched an exchange-traded fund to invest in Turkish equities. UBS Global Asset Management had the most emerging market fund launches, followed by Nordea then HSBC. All but five emerging market funds have a benchmark of some kind and among these, two-thirds use a benchmark provided by Morgan Stanley Capital International (MSCI), a finding that testifies to MSCI's dominant market position. Three funds use a benchmark provided by JP Morgan, while Effas, Markit and WSE supply the benchmark for one fund each. The fund with the largest assets under management is an exchange-traded fund from UBS that tracks the MSCI Emerging Markets Net Total Return Index and has €860 million under management. The ETF (exchange traded fund) replicates the index synthetically using swaps, but UBS says the swap counterparty exposure is collateralised by 105% with Ucits-compliant collateral. The fund was launched on 27 April, 2011. Unfortunately, the markets have not been kind to the UBS fund and in the three months ending 30 September, 2011, it lost 22.77%, in line with its benchmark. Several other emerging market funds made losses during what was one of the most difficult summers in recent memory. The Investec Global Strategy Fund Emerging Markets Equity fund, which had €80.4 million assets under management on 30 September, lost 24.1% in the three months leading to that date, slightly worse than its benchmark. Meanwhile, the Allianz RCM IIS Asian Small Cap, managed by Dennis Lai and Ronald Chan, lost 25.24% in that period. The UBS ETF that tracks the MSCI Turkey index did well, delivering 19%, but the fund only launched on 18 August, 2011, midway through the most difficult patch. The emerging market funds which lived through the summer had a much tougher time. What about the rest?
The popularity of emerging market launches came at the expense, in proportional terms, of global funds. These accounted for less than a third of the funds in the survey, down from more than 40% last time. The proportion of European funds in the survey actually increased in percentage terms from just 22% in the last survey to 28% this time – a surprising result given the trauma in the eurozone which has caused both bonds and equities to sell off. But this figure is misleading because the total figure for Europe includes the UK and Switzerland. Strip these away and it leaves only eight fund launches, equivalent to just 13% of the total. There were four Switzerland funds in the survey, all launched by UBS. Three invest in Swiss equities while the fourth is a silver ETF that is backed by physical bars of silver stored in a high-security Swiss vault. Likewise, there were five UK funds from the same company: Aviva Investors. These are real estate funds that promise liability-driven investment into long-term assets and include a commercial assets fund, infrastructure fund and student assets fund. Only three funds in the survey target North America. There are two ETFs; one from UBS that tracks the MSCI North America Socially Responsible index and one from Ossiam, owned by Natixis, which invests in the iStoxx index. And there is a fund from Allianz that invests in equities and bonds in the United States. It is perhaps surprising that North American funds take up such a small proportion of fund launches, 5%, but it is not a great change from the previous survey. The surveys suggest that European fund providers do not think there is much demand in Europe for North American funds. Why emerging markets?
Providers clearly see a growing demand for emerging market funds, and with good reason. Emerging market economies such as China and Brazil are enjoying rapid GDP growth and investors want exposure. In addition, emerging market funds are becoming more mainstream. Institutional investors which, ten years ago, were nervous about allocating money to such funds are today embracing emerging market products. This comes as retail investors wake up to the opportunity. But this year has seen another factor grow steadily more important: debt. Both Europe and the United States are struggling under the weight of their debt burden. US politicians have yet to produce a solution to the country’s debt, while in Europe, the future of the single currency is in doubt due to spiralling debt problems in Italy, Spain and elsewhere. Faced with this dismal outlook, it is no surprise investors are abandoning the developed world and turning to the likes of China and Brazil. Fund providers are doing their best to provide the right products. This trend is likely to accelerate as investors in emerging markets become increasingly important clients for asset managers. ©2011 funds europe

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