This is a rebound from a low of €169 billion in 2008, and above the pre-crisis level of €362 billion in 2007 – a result of strong investor flows as well as performance returns, and an indication that this asset class is not a fad, and part of a long-term shift in investor preference, Cerulli says.
“The opportunity in emerging markets is well-established. At current growth rates, AUM in emerging market funds could reach close to €800 billion over the next few years. Emerging markets now account for a greater share of global GDP, which is not yet reflected in capital markets or in investor portfolios,” the research report says, according to a press release.Cerulli says that to date, investors have preferred the reassurance of an established name when investing in emerging markets, but this may change as successful stock-picking funds soft close, or as investors seek to diversify their value-based investment. The increasing complexity of the emerging market universe has paved the way for more creative growth strategies. At the other end of the spectrum, appetite for local currency debt products will continue to grow as investors seek to diversify away from developed market currencies.
Even if some investors have yet to enact a significant shift in their portfolios, emerging markets have become more core than satellite, Cerulli notes. This raises the question of where to go next for the higher risk/higher reward part of the portfolio. For many, the solution has been frontier markets.
According to Cerulli’s research, AUM in frontier funds is now approaching pre-crunch levels of €6.5 billion, but net new flows lag behind 2007 levels, which perhaps confirm the status of frontier markets as a bull market phenomenon. At the margins, sophisticated institutional and private client investors have been making an allocation to frontier markets, with Africa and the Middle East attracting the most interest. This is mainly because they are tied in with the commodities story and are therefore seen as exhibiting the greatest long-term growth potential.
Frontier markets are subject to idiosyncratic rules and customs and managers cannot be easily “parachuted” in from other areas. Fund flows are erratic and the risk of ill-managed liquidity significant. More than anything, these markets require a long-term commitment from asset managers, and may only be suitable for specialists and those wanting to ensure they have a full suite of emerging market products.