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Emerging markets losing lustre

Pictet Asset Management now banking on green investments

A PIONEER in emerging market investments and environmental funds is sounding caution on emerging markets, even as he hails the green theme as the wave of the future.

Renaud de Planta, chief executive of Pictet Asset Management, says emerging markets could underperform mature markets in the near term. In the last four years, emerging markets have delivered stellar returns amid massive inflows as institutions and individuals search for higher yields. ‘Globally, as much as we’re a pioneer and forceful defender of emerging markets investment, in the last few months, we’ve become bearish relative to developed markets.

‘We think the core developed markets of the US, Japan and parts of Europe will outperform the emerging markets over the next two years,’ says Mr de Planta, who is also a managing partner with Pictet & Cie.

The firm looks at a number of metrics in its research, including price earnings and price to book value and price to cash flow multiples, as well as price to capacity which is a proprietary indicator. ‘All the signals tell us that emerging markets are over-extended, but they’re less over-extended in Asia compared with Eastern Europe and Latin America.’

Pictet Asset Management manages a total of US$130 billion in assets. Of this, US$20 billion are in emerging equities. Another US$40 billion are in environment-related investments, including utility and thematic funds like clean energy.

The Singapore office looks after Asian fixed income, and the funds marketing office is based in Hong Kong.

Mr de Planta is convinced that socially responsible investing (SRI) will take root and flourish. So far, while private banks and some retail fund managers are pushing environmental themes like climate change and clean energy, Asian institutions have been cool to funds in the SRI space. One of the most common reservations is that SRI investments will suffer in returns compared with investments without any SRI screen.

Mr de Planta is unperturbed about Asia’s lukewarm response. As for returns, the proof is in Pictet’s pudding. The firm pioneered what it says is the world’s first water fund about seven years ago. On a cumulative basis, the PF (Lux) Water-P Cap fund has returned 61 per cent since inception in 2000 compared with the MSCI World’s minus 4.33 per cent. On an annualised basis, the fund has delivered 6.33 per cent against the MSCI’s minus 0.57 per cent.

The fund has some 4.33 billion euros (S$9.3 billion) in assets.

Earlier this year in May, the firm launched a Luxembourg-domiciled clean energy fund. In about five months up to end-October, the fund has returned 29 per cent against the MSCI World index’s 6.42 per cent. The fund has US $756 million in assets.

‘When we started about 10 years ago we were one of the first with SRI funds. We were convinced it would be a fundamental change which is long-lasting because the environment is being destroyed at an unprecedented pace and the growth of the emerging world makes this even more visible.

‘The solution to environmental destruction and emissions is not only government, but the real business world.

There will be massive investment needs in new air filtration and water filtration technology, fuel efficient cars, alternative energy and so on. Investors are now very sensitive to this.’

Over the past couple of years, the firm has polled 200 institutional investors. About 70 per cent indicated that they wish to allocate assets to SRI or environmental themes. Of these investors, half are likely to invest through thematic funds like water, clean air and energy funds.

Mr de Planta says the question of whether SRI funds suffer in performance is much debated. ‘In the energy sector, if you impose good corporate governance and environmental practice, you do avoid the big accidents. Big chemical companies that are not properly managed and do not invest in safety can have huge disasters that wipe out the company.’ In this respect, Union Carbide with its Bhopal gas leak disaster comes to mind. Poor corporate governance also sank Enron.

In its SRI stable, Pictet offers broad-based and focused funds. For its broad-based funds, it pursues a best-in-class approach where its managers pick the companies which rank the highest in environmental as well as social factors, including how employees are treated and whether the company uses child labour. For the focused funds, the firm screens for companies that are ‘significantly active’, deriving 20 to 100 per cent of profits from activities like clean water and energy.

The focused funds, however, are not screened for social or governance factors. ‘If we impose too many constraints, the universe becomes too narrow. We could miss out on interesting companies with leading technologies. They may be young companies and may not yet have the best corporate governance or the most social human resource policies, but they’re on the way towards these goals.’

Meanwhile, in the emerging markets space, the firm is, interestingly, sceptical of the BRIC concept. BRIC spells Brazil, Russia, India and China. First articulated by Goldman Sachs in a 2003 report, the concept has since taken on a life of its own. BRIC, says Mr de Planta, appears to be a marketing concept to simplify the emerging markets for the US public. ‘In the short term it’s self-fulfilling if you promote the theme well. Let’s see in five years if anyone still talks about BRIC.’

One of the screens the firm uses in its emerging markets research is its own proprietary measure, price to capacity, where it examines the production capacity of companies based on interviews and industry reports. The metric can yield insights on the relative attractiveness of a country or currency against the rest of the region and against developed markets.

‘We think emerging market equities at this juncture are over-rated. We’ve seen in history that every time the emerging market metrics exceed the developed markets, it signals a turning point. On the debt side it’s slightly different. This is because the re-rating potential of some currencies in the region is substantial. The recent crisis of the dollar is a catalyst for changes in the currencies.’

 

Source: Business Times 28 Nov 07

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