urrency turmoil in China and fears of a global slowdown have led investors to abandon emerging markets in droves, rattling the large asset-management firms that have long promoted such investments in their hunt for higher returns.
For more than a decade, star managers at Franklin Templeton, Pimco, Aberdeen and Oppenheimer seemed more like Marco Polos than Warren Buffetts, beating a path to Internet companies in China, oil giants in Brazil, and gold mines in South Africa.
Investing in these high-risk markets came to be seen as a necessity for a diversified portfolio as well as an opportunity for these firms to levy some of the highest fees in the industry.
Now, with investors fleeing in a fury, asset management firms are struggling to staunch the bleeding.
Last year, a record $105 billion was pulled out of global mutual funds, with 26 per cent of that figure coming from asset managers based in the United States, according to the fund tracker, EPFR.
It was the third consecutive year of bond and equity outflows and one would have go back to the Asian crisis era of the late 1990s to see a similar retreat, said Cameron Brandt, head of research at the data provider.
“This has become a chronic condition as opposed to the sudden onset of something,” Brandt said. “There is almost no conviction out there right now.”
For large fund companies whose assets under management ballooned on the back of these flows, the world has changed drastically, largely for the worse.
Take the global bond manager Pimco. It has three bond funds that invest in developing markets that the research firm Morningstar tracks: a local currency sovereign bond fund worth $4.7 billion; a broader vehicle valued at $1.7 billion, and a corporate bond fund whose assets have eroded to $202 million from more than $1 billion.
In total, emerging market funds managed by Pimco lost $6 billion last year, according to Morningstar.
Pimco has had to steady itself after the explosive departure of a star manager, William H Gross, in 2014. Yet the emerging market outflows, on top of the billions of dollars that followed Gross out the door, have only added to the firm’s woes.
Pimco, once the world’s largest manager of emerging market bonds, has experienced industry-lagging returns from outsize bets in Brazil and Russia have propelled an investor exodus that is getting worse by the month.
In December, investors pulled $619 million from the firm’s local currency fund, which has lost 21 per cent of its value over the past year, trailing every fund in the category except one, according to Morningstar.
A $15 billion fund in 2013, it now languishes below $5 billion.
While Pimco may be struggling, it is certainly not alone. A local currency debt fund run by MFS investment management in Boston lost $1.4 billion last year and Trust Company of the West in Los Angeles had outflows of $1.8 billion from its $2.6 billion bond offering last year.
On the equity side, the $28 billion Oppenheimer Developing Markets fund suffered by far the largest exodus last year, with $5 billion departing the fund, according to Morningstar.
The fund is overseen by Justin Leverenz, who spends more than half the year circling the globe in search of unloved companies. But Leverenz was hurt in 2015 from big positions in Chinese Internet companies like Alibaba, which lost 30 per cent over the past year.
And in Europe, Aberdeen Asset Management, which manages $403 billion and specialises in emerging markets, had $48 billion leave the firm. Aberdeen’s stock price fell by half for the year.
Traders and portfolio managers say that what worries them now is the sense that sophisticated institutional investors, who generally tend to take a longer-term view than their retail counterparts (and who might even be inclined to buy at these levels), have been the ones driving the selling over the last six months.
Instead of taking advantage of bond and company valuations that are at historic lows, these investors are acting more like lemmings, unloading the good and the bad in their portfolios because that is what they see their peers doing. The panicky climate is also forcing managers to have a chunk of cash on hand to meet redemption requests.
“We are seeing evidence that institutional investors are capitulating,” said Charles Collyns, an economist at the Institute of International Finance, using an industry term to describe the practice of wholesale selling when all hope is lost.
In a recent survey of more than 100 investment managers conducted by Northern Trust in Chicago, the no 1 risk factor cited by respondents was that problems in China would continue to bring down growth rates in the developing world. Also of concern, regulators and economists say, is the fact that many emerging market securities, especially bonds, can be very hard to sell, especially when markets are declining.
The surprise decision taken by Third Avenue Management last month to close down a junk bond fund because it could not meet investor demands for cash has heightened fears that an emerging market bond fund could find itself in a similar position.
“There is definitely a liquidity concern out there,” said Brandt, research director at EPFR. “People are asking: ‘If I don’t get my stuff out now, will I be able to get it out later?”
Things would need to get much worse for that to happen. The bonds that trade in countries like Turkey, Mexico and Brazil are far more liquid than the deeply distressed corporate securities that Third Avenue’s credit fund favoured. — New York Times News Service
With investors fleeing in a fury, asset management firms are struggling to staunch the bleeding
