By David K. Randall
NEW YORK, July 24 (Reuters) – The recent economic slowdown
in China and Brazil is prompting some investors to take a
decidedly old-school approach when it comes to emerging markets:
stock-picking.
Though buying and selling individual companies based on
their merits is as old as Wall Street itself, it’s a practice
that had fallen out of favor recently.
The rapid growth in emerging markets like China, Brazil and
India over the past few years led many to pass over active
management on the theory that a rising tide would lift boats
throughout the developing world. Dollars flowed instead to
passively managed index funds and exchange traded funds such as
the $50.6 billion Vanguard MSCI Emerging Markets ETF,
which now is one of the largest funds in the world by assets
under management.
But popularity comes with its downsides. Some advisers and
money managers contend that passively managed emerging markets
funds are too top-weighted toward exporters and other cyclical
industries whose revenues may be tied to economic growth in the
U.S. or Europe. These managers are instead turning to active
management, or stock-picking, to target the global emerging
middle class.
“What we want to invest in is in Indians who can buy an
extra bottle of shampoo or extra shirts. I don’t want to invest
in another call center for Europe because the consumption of the
developed world is very sluggish,” said Weyman Gong, a principal
at Signature, a Norfolk, Virginia based wealth management firm
with about $2 billion in assets under management.
Emerging market index funds tend to be too tied toward
industries like energy or mining rather than smaller companies
that focus on providing such basics of middle class life as cell
phone service, food and entertainment, Gong said.
The iShares MSCI Brazil index, for instance, has
about 35 percent of its portfolio invested in the energy and
materials sectors, according to Morningstar. The Market Vectors
Russia ETF, meanwhile, has 40 percent of its portfolio
invested in energy companies. Vanguard’s large MSCI Emerging
Markets fund has about 35 percent of its portfolio invested in
materials, financials or energy companies.
“We try not to use ETFs in emerging markets, with Russia
being the extreme example. You’re not investing in Russia with
these funds, you’re investing in global oil,” he said.
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