| NEW YORK, July 24
NEW YORK, July 24 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:
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
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
"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.
Gong favors actively managed funds like the $1.6 billion
Harding Loevner Emerging Markets Advisor fund, which
has overweight stakes in technology, healthcare and defensive
stocks. The fund, whose top holdings include Samsung Electronics
, Wal-Mart de Mexico, and Baidu
, is up 5.8 percent for the year.
Mutual fund managers say that their ability to deviate from
a benchmark index gives them an advantage.
"Stock-picking is valuable now because you are seeing some
companies do a lot better than their economies. When you see
investors selling everything (because of economic reports), it
presents opportunities," said Larry Seruma, the portfolio
manager of the $14.3 million Nile Pan Africa Fund.
He's targeting consumers in Egypt, South Africa, Kenya and
other developing nations in Africa through companies like East
African Breweries, which brews and distributes brands
like Bell beer and Smirnoff vodka in East Africa, and Tiger
Brands Limited which sells packaged foods like Black
Cat Peanut Butter.
Seruma points to stock-picking as one reason for his strong
performance this year. The fund is up 25.2 percent for the year,
according to data from Lipper, compared with a 4.4 gain for the
iShares MSCI Emerging Markets fund, a cap-weighted ETF.
"The big problem with ETFs is that they are always
flat-footed because they have fixed weights," he said.
The top ten performing actively managed emerging markets
funds have gained an average of 12.1 percent since the start of
the year, according to Morningstar. The best passive index and
ETF funds, meanwhile, have returned an average of 11.4 percent,
a return boosted by gains of 30 percent each for ETFs that
target Egypt and Turkey, exclusively. Take out those outliers,
and the average gain shrinks to 6.9 percent.
Richard Gao, portfolio manager of the $5.9 billion Matthews
Pacific Tiger Fund, said that the Asian stock markets
were in the midst of a transition that's not reflected in the
"Asia's growth going forward will be more and more driven by
the domestic economy rather than relying on export growth or
infrastructure growth like they did in the past," he said.
As a result, he's focusing on consumers through companies
like Malaysia-based Genting, a conglomerate whose
businesses span from casinos to power generation, and Ping An
Insurance Group, a Chinese insurance and financial
services company which employs nearly half a million life
Derrick Irwin, a portfolio manager with the $2.7 billion
Wells Fargo Advantage Emerging Markets Equity Fund (EMGAX), said
that he expects concerns about slowing growth rates in China and
India to lead to volatile markets through the rest of the year.
"Right now it's a tough environment to be picking stocks,
but we think it's the right thing to be doing," he said.
He's been buying consumer companies in China, India and
Brazil like Brazilian retailer Lojas Americanas S.A.
that have strong brand names or other competitive advantages.
One pick, Tingyi, sells packaged noodles and does much
of the bottling for PepsiCo in China.
"This is a way to piggyback on Pepsi's world-class branding
efforts using Tingyi's excellent distribution network," he said.