Market timing is far more important than sector selection, according to emerging market debt fund ma...
Market timing is far more important than sector selection, according to emerging market debt fund managers Ashmore, which is set to launch its first emerging equity fund.
The premise for the new launch is that an understanding of sovereign and macroeconomic factors is the key to emerging market investing, and working on this basis should surpass the returns available from a stock-focused approach.
Jerome Booth, director at Ashmore, which runs over $600m in emerging market debt, said: "Timing the ups and downs of the cycle is the most important factor for successful investing in emerging markets.
"The key is to understand sovereign risk. All other factors, such as sectoral analysis, are far less important and only become relevant during a bull phase.
"It could be said that the defining characteristic of emerging markets investing is that there is no level playing field. You could possibly find a great company in one of these markets, but if there is a 30% currency devaluation that company will be in trouble. Its dollar debt servicing costs will rocket and it will be in the middle of a local recession.
"Our premise is that you would make far more money as an investor by working out the sovereign risk and aiming to get out before the devaluation. This is where our experience as emerging debt investors comes into play.
"People often do not understand that even for an equity manager, getting the macro picture right is far more important than sector expertise."
As a consequence of this approach, Booth will invest mainly in the most liquid parts of the markets he favours, choosing the two or three most liquid stocks as a proxy for the sovereign risk element.
This approach will make up around 80% of the portfolio. The other 20% will, liquidity permitting, invest in second and third-tier 'special situations' stocks - those trading at a deep discount, often in anticipation of a specific event.
He said: "Again, this leverages off our existing expertise. Our team of 10 investment professionals have long experience of emerging markets, and for many of these stocks they would have invested in the corporate bond issues or possibly done corporate finance work for the company."
The fund's portfolio is not yet defined because it will not launch until the end of June.
"The interest rate climate globally is creating enormous opportunities. By the end of June there will be interesting opportunities in Korea, on the basis of value created by the restructuring of the chaebols. Similarly we anticipate positions in Russia, Venezuela, Brazil and Indonesia, among others. Altogether the portfolio will be highly diversified, with exposure to around 50 countries," Booth said.
Emerging market debt is one of the best-kept secrets around, he believes. The key element is information.
"Emerging markets are primarily top-down driven and there are huge information asymmetries - if you are 'in the loop' you can anticipate events."
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