Investors who want exposure to emerging markets should focus their attention on the region’s high growth technology sector, according to experts, with the likes of Nordea’s Jorry Nøddekær, T. Rowe Price’s Anh Lu and Hermes’ Gary Greenberg all upping their exposure recently.
Though returns have been disappointing relative to developed markets over the last five years or so thanks to slowing economic growth, currency headwinds and geo-political tensions, emerging markets have been one of the best asset classes for investors over the longer term.
Our data on the MSCI Emerging Markets index spans back to December 2000 over which time it has returned 323.51 per cent, beating the MSCI World index by a whopping 236.12 percentage points in the process.
Performance of indices since Dec 2000
Source: FE Analytics
However, thanks to changing dynamics within those economies, experts tend to agree that returns from emerging market equities aren’t likely to be as high over the next 10 years as they have been in the past.
As a result, they say investors need to be far more selective in their approach rather than sticking with the broad base emerging market exposure, even though it has worked so well in the past.
One area that has caught the attention of some of the best performing active managers in the emerging markets space is the technology sector, which is set to strengthen as wealth levels in the developing world increase.
Jorry Nøddekær, manager of the Nordea Emerging Stars Equity fund, is one manager who has been upping his exposure recently.
“About 31 per cent of our portfolio is in the IT sector. There is a good reason for this. It is all about where we feel we make a difference,” Nøddekær said.
“If you take oil companies as an example, performance is primarily driven by the oil price. Do we have a high enough conviction on the level of oil, with its numerous moving parts? No.”
“Where can we get a higher level of understanding? Can we exploit areas where the market is still too short-termist? Yes. This is primarily in technology, consumer discretionary and healthcare.”
Nøddekær, whose $1.7bn fund sits in the offshore universe but has comfortably outperformed both the IA Global Emerging Markets sector and MSCI Emerging Markets index since its launch in April 2011, says there are certain areas he is targeting more than others, though.
Performance of fund versus sector and index since April 2011
Source: FE Analytics
“In IT, our exposure is clustered in three areas. The first is what we call the ‘any factor’ – anywhere, anytime, any device. It is often called the ‘internet of things’,” he explained.
“We are also bullish on the semiconductor space – in companies such as TSMC, eMemory, MediaTek. Then there is the automation area, in high manufacturing. Chroma ATE is an amazing high tech company, working in many areas such as the Tesla and BMW electric cars.”
The technology sector has certainly been one of the best performing areas within emerging markets over recent years, like it has been around the world.
According to FE Analytics, while it’s higher beta characteristics means it has fallen further during the recent volatility, the MSCI Emerging Markets Information Technology index has nearly quadrupled the returns of the wider MSCI Emerging Markets index over the last five years.
Performance of indices over 5yrs
Source: FE Analytics
Anh Lu, who heads up the T. Rowe Price Asian ex Japan fund, says that given the outlook for some of the companies in the sector, there is no reason why that trend won’t continue.
“We are looking to take advantage of the continued growth in the online economy,” Lu, who holds 28.5 per cent of her $1bn fund in tech stocks (which translates as a 7 percentage point overweight relative to the benchmark), said.
“Vipshop is China’s leading online discount retailer, offering products at substantial discounts for limited periods of time. The company, which operates nationwide, already generates most of its transactions through mobile devices and still has a huge runway for growth.”
She added: “The focus is on user growth and out of 350m plus online shoppers in China, Vipshop still has just 24m active users today. Vipshop offers a compelling value proposition to brands and consumers and is a high-entry barrier business, with scale and operational expertise.”
The T. Rowe Price Asian ex Japan Equity fund has outperformed both the IA Asia Pacific ex Japan sector and its MSCI AX Asia ex Japan benchmark since Lu took charge in June 2009 with returns of 96.22 per cent.
The average fund in the IA Global Emerging Markets sector has 19.7 per cent in the tech sector, but there are a number of high-profile portfolios which are underweight the high growth industry.
These include the likes of Templeton Global Emerging Markets, Charlemagne Magna Emerging Markets Dividend and the top-performing Aberdeen funds headed-up by Devan Kaloo and his team.
However, Hermes’ Gary Greenberg says his peers are making a mistake if they were to avoid technology stocks.
His Hermes Global Emerging Markets fund, which has been a top quartile performer and beaten the index over one, three and five years, has 26.47 per cent of its assets in the sector (representing an 8 percentage point overweight).
He splits that exposure into separate parts – starting with e-commerce and social networks companies like Alibaba and Tencent.
“Tencent’s social media platform Weixin/WeChat has become nearly ubiquitous in China and has transformed itself into a vibrant ecosystem – generating mobile revenues from gaming, e-commerce and advertising,” Greenberg said.
“Tencent is now beginning to monetise mobile as the transition from the PC intensifies.”
He added: “We also own several software services companies, Tech Mahindra and HCL Technologies, in India which are focused on enabling companies to disrupt themselves before someone else does.”
“The idea is to allow companies to not only get on the internet, but actually transform their business into a very thin structure – by automating just about everything they do.”
