At the 2012 Morningstar Investment Conference, Bridget Hughes, associate director of fund analysis at Morningstar, moderated a panel of emerging-markets investors to shed light on the varied risk and rewards they encounter, as well as where today's opportunities lie. The panel included John Carlson, a senior portfolio manager for Fidelity Asset Management, David Nadel, a portfolio manager and director of international research for Royce & Associates, and Matthew Ryan, portfolio manager for MFS Investment management.
One of the Same
Each of the three managers invests in emerging markets via different strategies, but the trio were in agreement that the growth prospects of emerging-markets countries in conjunction with the relatively strong sovereign and corporate balance sheets have made investment opportunities in many emerging markets extremely attractive.
David Nadel, comanager of Royce Global Value RGVIX, finds emerging-markets equities quite inexpensive relative to U.S. equities. "Many of these businesses are nowhere near the peak of their earnings power," he noted, adding that the tremendous growth potential and current headline P/E ratios has made him bullish on the asset class.
As the manager of a global-stock fund, Nadel said he attempts to capitalize on emerging markets through three techniques: investing in companies based in the developed world that generate significant revenue in emerging-markets countries, investing in companies that trade globally but have their assets (gold or palm oil, for example) in emerging markets, or investing directly in high-quality emerging-markets companies. Regarding opportunities for access to emerging-markets growth in the developed world, he pointed to Switzerland, Austria, and Finland as having companies that were at the cutting edge of going global in terms of sources of revenue and sources of costs, creating investment opportunities to tap emerging-markets growth.
John Carlson, who manages Fidelity New Markets Income FNMIX and was named Morningstar's 2011 Fixed Income Manager of the year, has run this emerging-markets debt fund since 1995 when it was one of the first retail funds in the emerging-markets debt space. He said when he first started investing in this area, there were fewer than 10 countries in the underlying index, and today there are 47. The evolution of this asset class has created new opportunities in places like Colombia, where the government has been making tremendous strides and the country has a first-rate economic policy team in place.
Matthew Ryan, portfolio manager of MFS Emerging Markets Debt MEDAX, said, "Just look at the credit fundamentals of emerging-markets countries; they look light years ahead of the developed world." On top of that, he added, emerging-markets countries are generally improving stories and are poised for significant growth as opposed to the deterioration prevalent in the developed world. He notes that he likes to find exciting stories and opportunities that are a bit under the radar, and he currently favors Peru for its low inflation, high growth, solid credit metrics, and low debt/gross domestic product ratio.
Michelle Canavan is a Mutual Fund Analyst with Morningstar.
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