Active emerging market equity managers have been given a further incentive to invest ‘off benchmark' after recent market falls emphasised the role played by ETFs.
The EM sell-off last month went hand-in-hand with the $12.2bn (£7.4bn) in emerging market equity redemptions seen in January, according to EPFR Global, close to the $15bn outflow for 2013 as a whole and driven by $8bn in ETF outflows.
That has prompted emerging market managers to consider the implications of investing in stocks that make up their benchmark indices: stocks which appear increasingly volatile given their more liquid asset base and ETF interest.
"The [MSCI Emerging Markets] benchmark is only a third of our investable universe. There are lot of opportunities in the broader universe that will not be subject to big swings," said Paul Rogers, manager of the Lazard Emerging Markets Core Equity fund.
"We try to get out of the way of those retail flows."
Of the $6bn that exited EM equities in the week to 31 January, some $5bn came from institutional investors. But Rogers said Lazard had not seen significant redemptions.
"Some faster money needs to wash through, but we ourselves have not seen many institutional outflows, nor retail either," he said.
Kathryn Langridge, manager of the Jupiter Emerging Markets fund, agreed there is scope for further outflows, given the wave of money that has poured into the asset class in a low-rate world.
"The easy money that flowed in still has scope to flow out again. ETFs are amplifying the wider flows," she said.
At Lazard, Rogers acknowledged there are "no safe havens" for EM investors. Nonetheless, he is continuing to find value in countries such as Mexico, despite the country's indices looking pricier than most at 12 times earnings.
"We are finding interesting opportunities that are cheaper than average, such as REITs, which is a brand new asset class for the country," he said.
"In general, we continue to find opportunities. It is very difficult to time the market, but our strategy is to invest across growth and value and there is always an entry point."
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