SSgA: Be Choosy about Emerging Markets in 2014

It is time to look more closely at the broad-based label, according to the investment giant.

(December 2, 2013) — Back away from BRICs but embrace Eastern Europe next year, State Street Global Advisors (SSgA) has told its investor clients.

Bill Street, head of investments for Europe, Middle East, and Africa at the international asset manager said there were returns to be made from developing equity and bond markets over the coming year, but investors should be choosier than they had been in the past.

Street said he was positive on the emerging market trend generally, but “it is not one rising tide”.

“The BRICs are still tied to developed market success,” said Street, referring to the largest economies in this category: Brazil, Russia, India, and China, “so investors need to look further afield in 2014.”

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He said investors should not rely on beta-farming indexes that covered a large spectrum of countries as they would give away the gains made by the best-performing economies.

 “The ‘tapering tantrum’ caused some large hits to some emerging market economies, and it is no surprise that the ones hit the most had the structural problems or the largest current account deficits,” he said. “Investors will have to be—and many are already being—more qualitative in their approach to these economies, but there are opportunities in 2014.”

Street added that the majority of money flowing into emerging markets was now coming from institutional investors, rather than their retail market counterparts, which meant the assets were “sticky” not “hot” and were therefore less likely to rush from the sector at the first sign of trouble.

He said with developments in the US and other large economies, there would be obstacles to negotiate even with the most assured emerging markets, but SSgA was structurally supportive of the asset class.  

Regarding developed markets, Street believed the UK looked to be one of the strongest performers in 2014, with the US not far behind. SSgA has also taken a relatively bullish stance on Europe, and the Eurozone, buoyed by effective political movements and a reaffirmed confidence from market participants.

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Insourcing Is Flawed Path to Innovation, Researchers Say

Collaboration between asset owners has a better chance of producing inventive, viable ideas, according to Ashby Monk and Gordon Clark.

(Dec. 2, 2013) – Moving asset management in-house—or out-of-house, for that matter—has not tended to produce innovative ideas, according to two leading researchers.  

Engaging with fellow institutional investors shows more promise as a route to original thinking, argued Ashby Monk of Stanford and Gordon Clark of Oxford University in their latest paper.

“Cooperation and collaboration offer participants a level of informality missing in conventional modes of contracting, whether with in-house employees or with external service providers,” the authors wrote.

In the more flexible peer-to-peer relationships, asset owners “can create for themselves and for their institution action spaces that facilitate innovation which, if not particularly revolutionary, may well be transformative over the longer term.”

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Monk and Clark remarked upon the “surprising lack of institutional innovation amongst asset owners,” and detailed ways in which asset owners might connect and cultivate ideas with one another.

Based on the authors’ experience and research, these relationships could be divided into the following four categories:

1) Conferences and research clubs: One of the simplest ways of checking out and keeping up with other investors is attending international events and invite-only briefings, the authors said. Research clubs could be fruitful, but tended to have a limited life as they grow and membership exceeds usefulness.

2) Seeding-related ventures: This strategy involved creating a business venture —whether a hedge fund or emerging markets manager—that was separate from sponsoring institutions, according to the paper. It has proven useful as a laboratory for testing out alterative methods of compensations, decision-making, or styles of investing.

3) Partnerships (informal and formal): Economies of scale have benefitted asset owners who hav banded together in negotiating contracts with service providers, Clark and Monk noted. Large institutions can dodge the organizational complexity of insourcing by partnering with major providers. But whatever the partnership logistics, larger partners have power on their side.

4.) Investment clubs and shared equity: The authors found that clubs often aim to join partners with aligned interests, or members whose invectives are consistent in the long-term with certain investment managers. Finally, the size and scope of investments must be fitting for the members. These types of relationships have often been forged to bankroll major infrastructure projects. To the extent that asset owners control entry and exit from these deals, the authors wrote, “these arrangements can provide opportunities for remaking or realigning” the insourcing vs. outsourcing paradigm. 

“In-house management or outsourcing has not provided an adequate action space for innovation,” Monk and Clark concluded. With either method, senior institutional staff members’ “authority and control over portfolio managers has been compromised by industry-wide norms and conventions that favor continuity over innovation.”

But by breaching that continuity through asset-owner connection, the researchers found much evidence for the emergence of “action spaces” ripe for innovation.

Access the full paper, “Transcending Home Bias: Institutional Innovation through Cooperation and Collaboration in the Context of Financial Instability,” here.

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