BEING an emerging-market fund manager used to be fun. They enjoyed trips to exotic locations, faced less competition than those managing American or European equities and were so flush with cash that some funds could turn investors away. Today, emerging-market investing is less of a jaunt. The globetrotting that money managers do now is mainly to beg nervous investors not to sell up.
Their entreaties are falling on deaf ears. In August alone investors pulled $10 billion from bond funds and $24 billion from various types of equity funds, according to the Institute of International Finance. Add in the effect of falling markets and the stock of investment in emerging-market exchange-traded funds (ETFs) and mutual funds has fallen from $1.37 trillion in December to $1.17 trillion now, the lowest since June 2012. Money is being carted away from the emerging world almost as fast as during the “taper tantrum” of 2013. Brazil, China, Indonesia and Turkey have suffered the largest outflows, largely due to continuing doubts over their growth prospects and the stability of their currencies. Faced with pervasive uncertainty, investment managers of all stripes have a lower weighting in emerging markets than at any time since 2008.
“It’s been murderous,” says Paul McNamara of GAM, an asset-management firm. Flightier investors pulled out months ago, but this summer more patient institutions, such as pension funds and insurers, fled too. Three years of disappointing returns were quite enough. The numbers are magnified, says Robert Burgess from Deutsche Bank, because investors from emerging markets themselves (especially Chinese and Russians) have also been selling up, unlike in 2013. To complete the misery, central banks and sovereign investors, particularly from the Gulf states, are selling foreign assets to raise the cash they need to plug their budget deficits.
The pain has been felt everywhere. Local-currency funds have suffered because of the depreciation of most emerging-market currencies. ETFs have fallen in line with the indices they track. This passive approach has left them exposed to the especially poor performance of state-owned enterprises and energy firms, says a manager at an active fund, who claims to have fared better because he could avoid such stocks. BlackRock’s MSCI emerging-market ETF, for example, has seen net withdrawals of $7.4 billion this year.
But actively managed emerging-market-focused fund groups, such as Ashmore and Aberdeen, have also been battered. Since the start of summer, their share prices have dropped by more than a quarter, accelerated by hedge funds that shorted their stocks (ie, bet that their share prices would fall further).
Other hedge funds—those with a focus on emerging markets—have shared in the misery, with some losing as much as 20-30% in July. But by August, most had cut their exposure and are now holding a lot of cash, says David Walter of PAAMCO, a fund of hedge funds. Some, like ESG’s Nexus fund and Harbour Capital, called the Chinese crash early and took short positions which worked out well. The question for them is when to call the bottom: some funds are said to be looking for bargains in expectation of a rebound.