How global emerging markets investors view EM companies

Global emerging markets (EM) investors are an important classification of investor for EM companies, with an estimated $1.7 tn in both passive and active investments linked to the MSCI Emerging Markets Index alone. The actively managed side of that equation comprises funds typified by more concentrated portfolios and longer-term investment horizons.

These funds use an index (often the MSCI Emerging Markets Index) as their performance benchmark but have full discretion over portfolio allocations among global EM countries, sectors and companies. Because of this, their portfolio allocations are a strong indicator of sentiment and conviction across the wide spectrum of EM investment opportunities.

We analyze the holdings of 120 prominent EM active funds, providing insights into the companies that the world’s foremost EM equity investors trust and rely on for returns. Here we highlight the stocks that are most preferred stocks, least preferred and that show the largest changes in ownership in 2015. The combined assets under management of this group of funds total $250 bn and the average number of stocks held per fund is 144.

Most preferred

Table 1 shows the most widely owned stocks among EM active funds, with a remarkable 94 percent of funds holding Taiwan Semiconductor Manufacturing Company ahead of Samsung Electronics (73 percent), Tencent Holdings and China Mobile (67 percent each).  


For all tables in article: latest prices and fund weights as of December 31, 2015; data courtesy of FactSet, Bloomberg, MSCI, Edgar & Copley Fund Research

The fact that three technology companies occupy the top spots serves to highlight the growing importance of the information technology sector for EM investors, with the traditional EM bastions of energy and materials taking an ever-smaller share in active portfolios. Note also the large investment (more than $3 tn) in AIA Group, one of a number of non-benchmark stocks from developed countries that EM investors now own.

Least preferred

The least-preferred stocks across the EM universe are those within the benchmark index that have been largely avoided by EM investors (see table 2). Here we see a number of high-profile companies, including China Steel, VTB Bank and BYD attracting almost no investment from EM active funds.



This serves to remind IR teams of two facts: firstly, a stock’s inclusion in one of the large benchmark indices does not guarantee a place in actively managed portfolios. Secondly, exclusion from the benchmark index isn’t a barrier to attracting investment from international EM funds. This should encourage companies outside the MSCI Emerging Markets Index to engage with global EM active investors because they have a clear mandate to look beyond benchmarks in order to generate portfolio returns.  

2015 activity

Table 3 analyzes the key changes in stock ownership among EM funds for the period December 31, 2014 to December 31, 2015. We look for stocks that have seen a large net number of funds opening or closing positions together with increasing or decreasing existing allocations.

The stocks seeing the largest increases in ownership are dominated by tech and consumer companies and are predominantly located across Asia. These include Largan Precision – which attracted investment from BlackRock, JPMorgan and Lazard, among others – plus several US-listed Chinese companies (JD.com, Vipshop and Ctrip.com) that were added to the MSCI Emerging Markets Index in November 2015.  



Those seeing decreases in ownership are more diverse from a sector perspective and include a greater number of stocks from outside emerging Asia, notably Brazil’s two largest energy and materials monoliths Petrobras and Vale (see table 4). Topping the list is Kroton Educacional, which, despite a strong showing in many IR surveys, saw investor flight of significant proportions last year, with the EM funds of Schroders, Thornburg and Baron Funds, among many others, all closing down positions.



With 2016 promising to be another challenging year for EM investors, EM active funds will be heavily scrutinized for their country, sector and stock allocations, both by their own investors and by their internal risk management. We would advise IR teams to stay abreast of market positioning and focus on allocation changes in their stock and those of their competitors.  

Communicating with existing investors and targeting prospects with interests in your region or industry will be key to attracting and retaining investment from these asset-heavy, long-only and long-term investors.

Steven Holden is the founder of Copley Fund Research, an independent provider of data and analysis on global emerging market mutual fund positioning