US-BASED fund manager Vanguard Investments Inc has cautioned investors not to anticipate high returns in emerging markets based on high GDP growth, as it believes there is no long-term correlation between the two.
Vanguard, a US$1.4 trillion index fund manager, released its white paper “Investing in emerging markets: Evaluating the allure of rapid economic growth” after noting a growing trend of investors seeking out the high-growth prospects in emerging markets.
Vanguard chief economist and co-author Joe Davis said some investors were “reassessing” the role of emerging markets in their portfolios.
“Understandably, the allure of emerging markets can be strong, as faster economic growth is typically associated with stronger earnings growth, which is thought to be associated with higher stock returns,” he stated in a Monday press release.
Emerging-market investors were rewarded not because of economic growth but the risks they bore, he said.
But according to one Cambodia-specific private equity manager, investments should be weighed up against other factors, as opportunities do exist in developing markets.
Emerging Markets Investments managing director Joshua Morris said Monday that the paper’s finding was not surprising, as GDP growth alone is insufficient to base any investment decision on.
“Looking at just growth in terms of how well a country is going to perform economically is too one-dimensional,” said Morris, who runs a $10 million fund investing in Cambodia and Laos.
“[GDP] growth is a component, but if you want to know if the country of Cambodia would be a good bet over the longer term it’s a combination of multiple drivers that I think need to be looked at,” he said.
Morris also felt Cambodia could fall outside the scope of Vanguard’s comments, given that the fund manager worked mainly with publicly listed investments, and that Cambodia has no such market.
“Although a key driver for looking at the attractiveness of businesses at a fundamental level is looking at GDP for a country, it’s different to what a private equity fund manager would do. We’re looking at growth opportunities on a company by company basis as opposed to the whole country,” he said.
EMI’s fund seeks to make an annualised rate of return consistent with international private equity funds.