Portfolio Manager Perspectives

Jeff Benjamin

Emerging markets headed for a slowdown?

Stocks no longer cheap, says Acadian's John Chisholm; performance this year not likely to match ‘09

Apr 2, 2010 @ 1:40 pm

By Jeff Benjamin

Emerging-markets investors should stay the course — but buckle up for a bumpy ride.

That's the opinion of John Chisholm, chief investment officer at Acadian Asset Management LLC.

“It's definitely a volatile area and we suggest investors be aware of that,” he said. “Emerging markets is not a money market fund.”

But Mr. Chisholm added that some exposure to the world's fastest-growing economies is a must for any investor looking for a truly diversified portfolio.

Of the $41 billion that Acadian has under management, $10 billion is in emerging market vehicles, including the $630 million Acadian Emerging Markets Fund Ticker:(AEMGX).

The fund, which received a 2010 Lipper award for its 10-year annualized gain of 13.3%, gained more than 77% last year. That's just a bit above the emerging-market category average of 73.6%.

While Mr. Chisholm still sees good reasons to tap into certain emerging economies, he isn't expecting 2010's performance to track that of 2009.

“Back at the start of 2009, things were really cheap, everything looked good, and the markets bounced back strongly,” he said. “Today, things are not especially cheap and some could argue that the emerging markets are now fairly valued.”

With that in mind, he still likes the pace of economic growth found in select emerging markets, and he believes there are solid pockets of strong corporate earnings to be found.

The general Acadian strategy with regard to emerging markets involves both a top-down and bottom-up approach.

“You have to look at these markets from a top-down perspective, because when it comes to emerging economies, the market can have a huge impact,” he said.

He cites Argentina and Venezuela as examples of markets in which “destructive government policies” are hurting companies. “We carefully assess each market looking for the level of corruption,” he added.

On the other end of the spectrum, he likes the “pro-growth policies” in Taiwan and South Korea.

At 15%, South Korea is the largest country weighting in the fund, followed by Taiwan and India with 13% each.

Even though the fund has a 10% weighting in China, Mr. Chisholm admits to having some concerns about a credit bubble stemming from massive government stimulus programs.

The bottom-up stock picking part of the research looks at companies in the scope of four broad categories: growth, valuation, quality, and technical analysis.

The portfolio of 280 positions is constructed from a potential universe of about 6,000 emerging market companies that meet certain levels of market capitalization and liquidity.

“Despite the fact emerging markets are not terribly cheap right now,” Mr. Chisholm said, “they could still perform in line with developed markets for the next year or so.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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