Institutional investors and their fund managers have been talking about the importance of taking a long-term view for a long time. But other things, such as the performance surveys and peer pressure, tend to get in the way.
Now, Edinburgh-based Martin Currie Investments has drawn a line in the sand.
Martin Currie’s emerging markets team has come clean on a 20-year horizon for its clients to reap most or all of the benefits of its stock selection and portfolio management skills in the rapidly evolving emerging markets space.
Emerging markets are changing. They are morphing into developed markets, on the one hand, and frontier markets are morphing into emerging markets, on the other. Some are leap-frogging others.
And then there are the major questions surrounding the indices: which ones you use and what relevance they are.
So, investors need to settle back and enjoy the ride. The overriding fact, according to not only those with a vested interest in the space, such as Martin Currie, but virtually every research firm in the world, is that the new world of emerging markets will outperform the old world of developed markets in the long term. The new “long term” is now 20 years, not five-seven years as previously thought by big investors.
According to Alastair Reynolds, portfolio manager for emerging markets at Martin Currie, a good example of why investors should take a 20-year view if they can – as most super or KiwiSaver funds should be able to do for at least a significant segment of their overall assets – is in the technology space. And emerging markets tend to be leading the way there, notwithstanding all the press that Silicon Valley still commands.
“It will probably take 20 years before the world sees a full transfer to the electric car from what we have now,” he says. “There will be an opportunity for new suppliers which have never supplied vehicle manufacturers before. The changing shape of the automobile industry is happening now. But the trick will be picking the winners. We think it’s better to focus on the suppliers to the manufacturers, rather than the manufacturers themselves.”
To be fair, that’s not an uncommon view among fund managers and their institutional clients. But it is a really big subject for the super funds, in particular, to get their heads around, according to Kimon Kouryialas, the Melbourne-based head of Pan Asia business for Martin Currie.
Kouryialas says: “Discussing a 20-year time frame with a big investor has lots of nuances. The super funds and their asset consultants will always agree that it will be in the best interests of their members to take that 20-year investment horizon, and it will be in the best prospects for long-term performance. But to say ’20 years’ to an investment committee sounds scary. We love the fact that super funds are prepared to address this issue, though. It’s a conversation worth having.”
Reynolds believes that the stock selection attribution component for performance with emerging markets investing is becoming increasingly important. As an example, Martin Currie has historically owned a couple of Russian stocks in its portfolio for several years, delivering exceptional returns, even while Russia as a geographical allocation has been on the nose for most global investors.
“The MSCI [index] is just a reflection of where the money is,” he says. “For instance, financials, IT and communications sectors have become a lot more important in the past 20 years. You’d be better off making stock decisions rather than country ones.”
Kim Catechis, Martin Currie emerging markets head and a regular visitor to Australia and New Zealand, says that stock selection, in any investment strategy, will usually win out over broader sector allocations for returns.
He said on the recent visit to Australia that “everyone” bought the argument that the index was not the best way to get exposure in emerging markets, but, you have the peer and “survey” pressure.
As Martin Currie has it: if the guardians of long-term capital can adopt a 20-year view, the investment world would be a better place.
Greg Bright is publisher of Investor Strategy News (Australia)