Survey Sees Shift to Active Strategies for Emerging Markets Investments

Even as the US moves towards passive investing and indexing approaches, it appears that institutional investors will need to be more focused on an active investment approach to their emerging market equities investments in future.

Based on a survey of institutional investors, Oppenheimer Funds and Greenwich Associates report that economic development in emerging markets will be led by rising levels of education, infrastructure investment, and innovation. Investors see this shift from an “old economy” to a “new economy” as creating fundamental market change.

“Institutional investors see the evolution of emerging market countries from resource-based, commodity-dependent economies to more diversified and dynamic economies as the dominant trend for the next decade,” according to Andrew McCollum, a Greenwich Associates managing director. “As that transformation takes hold, investment managers’ ability to generate alpha will require a much more integrated investment process that focuses on bottom-up fundamentals but blends top-down macroeconomic and political perspectives.”

As emerging markets transform from resource-based economies focused on commodities, energy, and manufacturing to more diversified economies, there will be more of an emphasis on picking the right companies to invest in, rather than a broader country focus. Sectors such as healthcare and technology will be more in evidence in emerging markets. And economies that have been more export-focused will also get a boost from domestic demand, with the expansion of the middle class, making for growth in consumer goods industries.

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This shift in the emerging markets makeup will call for a greater emphasis on bottom-up fundamental analysis. While the bigger macroeconomic picture and geopolitical factors will still be important, the previous approach of rotating country exposure and focusing on the mostly state-owned enterprises that tend to make up a majority of a country’s market valuation is changing to more detailed knowledge of each country’s market, and the companies and industries it encompasses.

That’s why 78% of the US institutional investors surveyed expect that in the next 10 years, their emerging markets exposure will be in the form of active strategies rather than more passive strategies. And nearly 25% of endowments, foundations, and corporate pension plans with assets under management below the $1 billion threshold anticipate hiring an emerging-market equity manager in the next year, along with about 20% of public funds at the same asset size.

In addition, 31% of US investors and 85% of European investors expect that they will consider environmental, social, and governance (ESG) aspects in their analysis of emerging-markets investments.

The survey included 121 US and European institutional investors, such as corporate pension funds, public pension funds, endowments, and foundations.

Tags: Active Management, Emerging Markets, ESG, Greenwich, Oppenheimer

ETFs have been very good for State Street Corp.

As of January 31, 2017, State Street was managing more than $2 trillion in global ETF assets, and servicing 55% of the global industry’s ETFs and exchange traded products (ETPs) assets under management.

State Street was also named the recipient of the best custody service provider award at this year’s Fund Action ETF Innovation Awards. Past winners of these awards were chosen for their novel ideas, innovative fund products, and high service levels that helped both investors and clients.

In reaching the $2 trillion mark, Frank Koudelka, senior vice president at State Street, said more clients are continuing to bring their business to State Street “because of our commitment to the exchange-traded product structure, our ongoing investment in our proprietary, core platform, and our scale.”

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Koudelka said the bank’s big growth area continues to be broad beta ETFs that “still encompass the lion’s share of the market.”

“We have seen acceleration in the launches of smart and strategic beta and actively-managed ETFs,” he said. “The smart and strategic beta ETFs have been primarily across the equity asset class and actively-managed across fixed income.”

Another factor spurring ETF growth has been new trading strategies involving robo-advisory services and ETF strategists utilizing ETFs. He also has seen that more mutual fund asset managers are increasing their use of ETFs as an underlying holding in overall portfolios.

Looking forward, Koudelka said “the biggest gains in ETF trading will see the US market continuing to lead this market with a maturing retail and institutional marketplace. Most other global domiciles are dominated by retail or institutional. Having both of these markets adopting the ETF wrapper allows for increased liquidity via trading, narrowing spreads, and making the products more attractive for retail and advisor adoption.”

He also said that increased retail and advisor adoption will occur “due to migration of advisors to fee-based business. This should drive growth to robo-advisors and wrap/model portfolios. Additionally, fee pressure on active mutual fund managers will increase adoption of these strategies utilizing the ETF-wrapper. This will enable asset managers to maintain most of its fee, while reducing expenses like embedded commissions and shareholder servicing.”

However, he cautioned that some of this growth will be contingent on the regulatory environment regarding transparency requirements for active portfolios.

Tags: $2 trillion, ETFs, State Street