Emerging markets winning permanent place in institutional portfolios
GLOBAL - German institutional investors are beginning to make fast-growing emerging market economies part of their permanent investments, according to FIL Investment Management.
Hans-Jörg Frantzmann, managing director at Fidelity's German division, told IPE: "German investors are looking for different interest-rate exposures and are finding them in countries like New Zealand, Australia and Canada, but also in some Asian countries, as well as European countries outside the euro-zone."
Frantzmann pointed out that, until recently, German institutionals had tended to venture into markets outside the euro-zone only for "short trips", getting out as soon as they made some money.
"Now, investors say these are countries where they should always be present because they need new sources for good, stable returns," he said. "Ten years ago, they had the choice to diversify - now they have to."
Frantzmann acknowledged that, currently, only smaller investors are able to access many of the smaller, less liquid markets, but he said he was convinced demand would drive issuance.
He said yield spreads in bond funds - such as the Fidelity Spezialfonds for medium-sized German Versorgungswerke - reflected the growing interest in markets outside the euro-zone and US.
Despite a 100% foreign currency hedge, the fund's yield has fallen from about 2% in November 2011 to 1.2%.
"This shows that a lot of investors have had a similar idea, and broader diversification will become a permanent issue because of the crisis in the euro-zone and similar threats looming in the US and the UK," Frantzmann said.
For its Spezialfonds, Fidelity is mixing ex euro-zone and ex US government and quasi-government AAA bonds with high-quality corporates and emerging market bonds from countries likely to be upgraded.
Frantzmann said the brief for the fund came from an investment consultancy that "definitely nailed the problem that is worrying institutional investors most".
He added: "Since the definition of risk-free assets was challenged by the financial crisis, they have to diversify their euro- and US-biased bond portfolios."
The Fidelity manager said he also saw insurers becoming more interested in regional diversification and corporate bonds because regulators in Germany and Austria had criticised the risk concentration in their euro-centric portfolios.
"They know they are under-diversified, and many are realising when hiring an external asset manager that it makes sense to give them a global brief and let them pick the best markets rather than confining them to Europe," Frantzmann said.
He said German institutionals' euro-centric focus stemmed from a "misunderstood asset liability concept focusing solely on currencies".