The higher returns of emerging markets should be the answer to the problems facing poorly performing European pension funds. Sluggish equity markets, low dividends and the risks of being on the wrong end of a new corporate governance drama (like that of Enron or Parmalat) are starting to make emerging markets relatively more attractive.
European pension fund managers have been slow to realise the possibilities of emerging market debt but it is getting to the stage at which ignoring it almost amounts to a dereliction of duty.
Ashmore Investment Management is one fund manager that has focused on emerging market debt and has notched up an average return of 25% since 1992.
Head of research Jerome Booth says: “The emerging debt market is now one in which one can benefit significantly from the economic diversification across what are very different interest rate and macro-cycles.”
Mr Booth lists the following as good reasons to get into emerging market debt: high returns, lower volatility than any equity market – emerging debt is also now less volatile than global bonds – low correlations to major markets (particularly fixed income markets) and strong diversification benefits.
Pension funds are dipping their toes in the water but, in typical fashion, by the time they get around to taking the plunge, the market will have moved on. Brian Caplen
