Emerging-markets slide forces advisers to rethink strategy

Lousy first half leads to patience for some, immediate action for others

Jul 23, 2013 @ 2:16 pm

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Because emerging-markets investments struggled in the first half, financial advisers have been forced to adjust their approach to the inherently volatile sector.

Although many advisers are maintaining their positions on the expectations of long-term growth in the sector, others see shifting market conditions as an immediate opportunity.

“There was this expectation that the developing world would grow as the developed world slowed,” said Dan Dingus, director of portfolio management at Fragasso Financial Advisors. “We've learned that the decoupling hasn't really happened.”

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The idea that emerging markets had reached a stage of unlimited growth, once a popular mindset due to the meteoric ascendance of the BRIC economies, has been discredited. In the first half this year, the MSCI Emerging Market Index declined about 10%.

The poor performance has given rise to two schools of thought, one based on patience and one on action. Mr. Dingus represents the latter, particularly when it comes to emerging-markets equities.

“We still like the asset class, but we've come to anticipate volatility,” he said. “There's still a lot of promise in emerging markets, [but] you just have to counter with active managers in that space.”

Bill Rocco, a senior fund analyst at Morningstar Inc., is more inclined to preach patience.

“Most financial advisers know what I would tell them. This volatility isn't a surprise,” Mr. Rocco said.

“You need to have a 10-, 15-, 20-year horizon, and you'll see that these swings aren't particularly severe,” he said.

Echoing the strategy of waiting out the market swings is Taylor Gang, vice president and wealth manager at Evensky & Katz LLC.

“This is still where you'll see a large percentage of the world's growth, so it certainly has a place in international allocations,” he said. “Long term, you'll wish you had an allocation.”

Evensky & Katz used to be bullish on emerging markets, but it made a conscious decision to get rid of its short-term exposure in 2010.

Christopher Cordaro, chief investment officer at registered investment adviser RegentAtlantic Capital LLC, is also advocating patience and an eye for the long game.

“Long term, emerging markets remain one of the most attractive asset classes,” he said. “We know they're going to be volatile, and we expect EMs to be the most volatile asset class in our clients' portfolios.”

In terms of specific emerging markets, advisers have shown a willingness to stick with the BRIC [Brazil, Russia, India and China] economies, though with less of a reliance on China that in the past.

And some see the Chinese economic slowdown and extrapolate the conditions to the entire developing world.

The opportunities increasingly found by Mr. Cordaro stem from the industrywide assumption that emerging markets are a homogenous group.

“All EMs are tarred with the same brush. One EM country will do something silly, and it'll bring the whole index down,” Mr. Cordaro said.

“But this presents an opportunity,” he said. “I try to tell my clients, 'We're not buying countries, we're buying stocks.'”

Although many in the industry are reacting swiftly to what is perceived as a bear market for emerging markets, a rather large segment seems amenable to weathering the storm, including Mr. Cordaro.

“If you're well-diversified, you can't have everything going up all at once,” he said.

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