‘Get away from the index’ Mark Mobius tells active managers in emerging markets

Emerging markets expert sees opportunity in active management and says now is the time to move away from the index.

Mark Mobius has urged the buy-side to ‘get away from the index’ and take advantage of active management opportunities which await in emerging markets.

The renowned emerging markets expert said the trend to follow the index was one of the reasons he left his famed role at Franklin Templeton Investments.

“The whole idea of us active investors now is to get away from the index, and one of the reasons why I decided to leave Franklin Templeton was that we were always being forced to lean towards the index,” said Mobius, speaking at TradeTech Europe.

“We say we’re active managers but we go into a closet and track beta, now we can say ‘we’re not tracking the index at all, we can have 20% in Egypt if we want’.”

“We’re looking at the Nigerians, Kenyans, smaller markets which the indices will not follow. The pool of money is growing, there’s no doubt about that, it’s about where the allocation will be.”

Despite a major uptick in passive management in emerging markets year-to-date coinciding with a downturn in active management, Mobius also predicted a change of fortunes, citing recent meetings with investors in the US.

“The gap between flows of funds active and passive shows you that there is a tremendous opportunity in active,” Mobius added.

“This is what we are finding with our clients: I was amazed by the eagerness – I was in the US recently with various pension funds and family offices – because they said they’ve followed these ETFs and now need something specialised and active.”

Speaking with Michael Fidance, head, CEEMEA sales trading at HSBC, the two discussed a range of emerging markets including India and China, with Mobius having high hopes for the former.

“The amount of IPO activity we expect in India will be equal to China,” Mobius added. “China is the big boy in this space mainly because of the index activity. Look at the ETF flows its going into China because it has a heavier weighting in the index. But that’s just a temporary activity because India is coming up very quickly.

China has been the big focus for emerging markets given its market liberalisation, along with a higher weighting of inclusion within the MSCI index.

China’s A-shares will increase to 20% of MSCI’s Emerging Market Index; making the total passive inflows into China to top $600 billion, while regulatory and market infrastructure changes are also increasing access to RMB- denominated assets.

The TRADE is set to publish a special emerging markets supplement later this month, in association with HSBC, and part of the focus in the issue is on the variable liquidity in emerging markets. Index inclusion, along with market reforms, is something which can have a major impact, making effective liquidity management in emerging markets critical for investment firms, particularly those operating under regulated UCITS banners.

“Liquidity is a major problem, which is why when we sign up a client we tell them to be ready to hang this money up for the next five years,” commented Mobius.

“The interesting thing now is that a lot of the issues from emerging markets are finding their way into the London and New York markets,” he added, referring to Alibaba’s listing on the New York Stock Exchange.