Justification for emerging markets investing

Here is a link (Building success) to a recent article by Financial Times capital markets correspondent David Oakley, where he very succinctly describes some of the justifications for emerging markets investing.  This article speaks about emerging markets investing much like I do and so I thought it was worth forwarding along.  At Frontier, we structure our portfolios with a decided overweight to the less developed regions of the world (relative to their weight in global indexes) because we agree with the idea that these markets will continue to move forward strongly and that, eventually, much more investment capital will recognize their contributions to global GDP.  As more capital flows their way that will have the effect of raising their share of global market capitalization to something much more in line with their share of global GDP.  While we completely acknowledge that we know nothing more than the rest of the market does and cannot predict the future, we do feel that to be responsible portfolio managers for our clients we need to use our perspective to make “informed guesses” about certain things.  Our overweight to emerging markets is a manifestation of one of those informed guesses.

I would like to point out the comments near the end of the article advising that one should pick and choose their emerging markets exposure carefully, hinting toward actively managed strategies (stock and country pickers).  We do not particularly disagree with this sentiment and firmly believe we must stay apprised of any growing risks in these regions (the possibility of asset bubbles in China, for example), but one must also be very careful that while the temptation to seek active management in emerging markets is strong, the performance data for emerging markets active managers shows they underperform their relevant passive indexes by an even greater degree than do developed markets active managers.  Finding smarter ways to get clients exposure to emerging markets is a constant focus at Frontier Advisors, but we refuse to stray from passive vehicles unless we have sufficient justification to do so, and that justification simply does not exist today.