(Pictured: Slim Feriani)
Emerging and frontier markets have taken a caning in the past couple of years as their economies have dropped back a cog and investors appear concerned about the impact of the US Government’s tapering. For the brave, however, the climate presents many opportunities.
Dr Slim Feriani, a former academic who is the chief executive and chief investment officer at London-based emerging markets specialist Advance Emerging Capital (AEC), says that one of the opportunities for active managers follows the growth of the ETF market.
ETFs currently account for about US$1.5 trillion, which is roughly the same size as the hedge fund industry. They are becoming increasingly popular for investors in emerging markets. Feriani estimates that about one-quarter of the professional money invested in emerging markets – $250 billion out of $1 trillion – is in ETFs.
“Active managers can certainly add a lot of value,” he says. “We struggle to understand how a basket of stocks [picked by an index provider], which is what an ETF is, can be perceived as a good alternative to a fund. The liquidity issue is fair enough. They do serve a short-term purpose. But for long-term sophisticated institutions they don’t make sense… But we can see ETFs as becoming increasingly influential.”
AEC is a fund of funds manager, investing with about 50 managers in 23 countries who in turn invest in about 70 emerging and frontier markets. It’s preferred investment vehicle, though, is a closed-end fund.
Feriani says there are two sides to liquidity. In a rising market a fund will often scramble to invest all the money and then, when markets are on the way down it will be even more challenging for the manager. Closed-end funds don’t have either problem.
“We have a strong preference for them when we can find them at good value,” he says. “The only problem for investors is that they may have to pay a premium or, on the way out, take a discount.” Most of the closed-end funds which invest in emerging and frontier markets are listed in London or New York.
Feriani is also among the increasingly loud chorus of investors who believe that the term “emerging markets” is outdated. Larry Fink, for instance, the chief executive of BlackRock, recently said investors should look at individual markets and stocks on their merits, rather than the grouping known as “emerging markets”.
And the index providers are not consistent. South Korea has been promoted to the developed markets category by FTSE but still remains in the developing category at MSCI. Hong Kong and Singapore, much small countries, were promoted to the developed category in the 1990s.
Feriani says that his firm regards them as “growth markets”. While earnings growth tends to drive markets, rather than GDP growth, AEC takes as its starting point to invest in growing countries. As a general rule, these markets will be less efficient and therefore present more opportunities for active managers.
AEC has its own closed-end fund, which was launched in 1998, as well as an open-ended equivalent. The fund has returned an average of 12 per cent a year over the past 16 years.
The double layer of fees paid by funds-of-funds managers, which tends to irk super funds, is something Feriani says the managers need to be aware of. What matters, he says, is the performance after all fees and charges. He also says AEC puts “huge pressure” on its underlying managers to reduce or contain their fees. The fact that the firm has an average holding period of four-and-a-half years for its investments given it additional pricing power.
AEC appointed third-party marketer John Donovan to represent it in Australia about two years ago. More recently, it appointed Roger Allen as business development director, based in London. The firm has about US$750 million invested in emerging markets. “We do think that small is beautiful,” Feriani says.