Emerging Market Growth Can Benefit U.S. Plans

OFI Global Asset Management, an OppenheimerFunds company, and Greenwich Associates, have released a new research report, “Institutional Perspectives: The Future of Emerging Markets Investing.”

The analysis condenses a series of more than 120 interviews with corporate pensions, public pensions, endowments and foundations, defined contribution plans, union plans, and investment consultants in the United States and Europe. Steve Paddon, head of institutional and international, OFI Global Asset Management, suggests there is clear evidence that all of these groups have an expanding appetite for emerging market investments.

“Ten years from now, respondents believe that emerging market economic development will be driven by increasing levels of education, modernizing infrastructure and innovation,” he explains. “The study found that institutional investors see the shift from ‘old economy’ to ‘new economy’ fueling fundamental change across these markets.”

Interpreting the results of the interviews, Andrew McCollum, managing director at Greenwich Associates, observes that investors are encouraged to see emerging-market countries broadly shifting from “resource-based, commodity-dependent economies to more diversified and dynamic economies.” This will be a dominant trend for the next decade, he says.

“As that transformation takes hold, investment managers’ ability to generate alpha will require a much more integrated investment process that focuses on bottom-up fundamentals but blends top-down macroeconomic and political perspectives,” McCollum speculates.

The report finds demand from institutional investors for external emerging markets expertise is growing. At this point nearly a quarter of endowments, foundations and corporate pensions with less than $1 billion in AUM say they expect to hire a new emerging market equity manager in the coming year, “as do nearly 20% of public funds of the same size.”

OppenheimerFunds and Greenwich Associates also point to evidence that some investors, in a related trend, are shifting towards smart-beta strategies. But, “in contrast to some investors shifting towards beta strategies, 78% of U.S. institutions participating in the interviews believe that active strategies will be their main vehicle for obtaining emerging market exposures in the next ten years.”

In addition, the research shows 31% of U.S. institutions expect to incorporate environmental, social, and governance (ESG) principles into their investments in emerging countries.

The full analysis is available here.