GLOBAL - Institutional investors, including pension funds, with allocations to emerging markets of more than 5% should focus away from BRICs in an approach that replicates their diversified exposure to developed markets, according to Cambridge Associates, a consultancy.
A paper on "making emerging market exposure more like developed market exposure" claimed that adopting long-only strategies focused on BRIC markets and "multinationals like Gazprom and Samsung" that happen to be in emerging markets meant investors would miss opportunities in smaller companies that are more directly exposed to emerging market growth.
Although such an approach potentially amplifies risks - the paper pointed positively to opportunities with managers investing in frontier markets - the authors also pointed to emerging markets being in "much better fiscal shape" than developed ones, with lower debt, "less financially onerous pension and healthcare obligations" and better capitalised banking systems.
The paper's authors also identified "compelling opportunities" in alternative asset classes including private equity and hedge funds, geared toward exploiting inherent inefficiencies.
Multi-asset approaches combining alpha and beta offered equity-like returns and lower volatility in the long term. Investing via illiquid vehicles offered investors access to consumer growth and to sectors currently under-represented in public markets.
Cambridge Associates' report said: "Since the number of institutional-quality emerging markets private equity funds is still somewhat limited, investors might look at certain other emerging markets funds that specialise in small, locally focused companies whose fortunes are tied more to organic emerging market growth than developed market exports."