| Marko Dimitrijevic, Everest Capital (Bloomberg) |
Everest Capital’s Marko Dimitrijevic thinks investors, especially institutions, are way underinvested in emerging markets and their more speculative cousins, frontier markets. The Miami-based manager, who has been traipsing around far-flung financial markets since 1991, told the audience Tuesday at the fifth annual Everest Capital Emerging Markets Forum at the Asia Society in New York that investors should be putting 25 percent of their assets in emerging markets. This represents emerging markets’ rough share of global stock market capitalization.
Yet, Dimitrijevic says U.S. plan sponsors have allocated, on average, only 7 percent of assets to these markets. “The gap is enormous,” he says. He likens the 20 percent or so difference between plan sponsors’ lower exposure and emerging markets’ share of global market cap to arbitrarily choosing not to invest in companies based in, say, the Midwest.
What’s more, Dimitrijevic says frontier markets combined represent 15 percent of the world economy, which he says is the same percentage as China. Yet money managers spend large amounts of time obsessing over what investments to make in China.
“Frontier markets represent 4 percent of world stock markets,” Dimitrijevic says. “Most managers have zero.” Many frontier markets, he says, are following the same economic development path that today’s mainstream emerging-markets countries negotiated 20 years ago.
He says part of the underexposure stems from a misconception. Many people associate frontier markets with revolutions, coups, tsunamis and floods. But Dimitrijevic insists such markets experience half the volatility of the U.S. market and one-third the volatility of Japan’s.
Hard to believe, huh?
Dimitrijevic stresses that to invest in emerging markets, and especially frontier markets, you have to take a top-down approach. “Macro is very important,” he says. “You must pick the right country and sectors from a macro standpoint.” As proof, he says most emerging markets rose between 2000 and 2007, but they have been moving in divergent directions ever since.
That’s a positive as well as a negative. Dimitrijevic points out that several countries that have seemingly similar demographics have fared much differently from each other. Take two countries, Pakistan — one of his current recommended themes identified at the conference — and Egypt, both of which have little correlation to overall global markets.
According to MSCI, the Pakistani market, which it classifies as a frontier market, is up 6 percent this year, more than 18 percent over the past year and 13.45 percent annualized over the past three years. Egypt, which MSCI considers an emerging market, is up 35.5 percent year to date, 58 percent over the past one-year period and 24 percent annualized over the past three years.
Good managers thrive by successfully identifying uncorrelated markets. However, the converse is getting the timing wrong because returns from one country to another are so diverse.
Take Argentina, one of the themes Dimitrijevic singled out among his current recommended opportunities. The market is up 15.7 percent year to date, according to MSCI. Yet it is down more than 12 percent in the most recent three-month period. And although its most recent one-year return rose more than 36 percent, its three-year annualized return is 2.6 percent, while its five-year annualized return is just 3.6 percent.
So, the returns on Argentina alone vary widely depending on whether you knew when to get into the market. If you were in the market for four or five years but gave up about a year ago, you made very little money. But does the recent three-month loss suggest the jig is up, or is now a good entry point?
Over the most recent three-year and five-year periods, by far the best frontier market to have been invested in was Kenya. Who can say they were invested in Kenya during that period or knew someone who was?
The best frontier market to have invested in over the past year was Bangladesh, up 66.7 percent over the most recent one-year period and 59 percent year to date, according to MSCI. Name two people you know who were invested there.
The underlying message is that to thrive in emerging and especially frontier markets, you have to be a deft macro market timer. Buying the entire basket isn’t a good alternative.
After all, the MSCI emerging-markets index is up about 0.76 percent year to date and just 0.24 percent over the most recent year. Its annualized returns over the past three and five years are just 5.35 percent and 1.76 percent, respectively. Going out ten years, the annualized return is 7.72 percent, says MSCI.
Frontier markets have fared much better in recent years. They are up, on average, 17 percent so far this year and 24 percent over the past year, according to MSCI.
Over the most recent three years, they are up 13.75, on average, per year. Yet over the most recent five and ten years, they are up between 4 percent and 5 percent. That’s almost not worth the risk taken.
So, does this data suggest investors should avoid these seemingly risky markets? No. But they should recognize the huge cost of identifying the wrong market or getting the timing wrong. Better leave that to the pros like Everest.
The firm’s oldest fund, Everest Capital Global, has compounded at 12.6 percent since its 1991 launch. Everest Capital Emerging Markets has compounded at 11.2 percent since its 1995 launch, while Everest Capital Frontier Markets has surged 10.9 percent since its 2008 inception, easily trouncing their benchmarks.
