Fund–of-fund (FoF) managers face the constant challenge of obtaining their preferred style, geographical, and sector biases with the comparatively “blunt” building blocks of mutual funds. This problem is particularly evident in sectors that might constitute a comprehensive exposure for other investors. The broad nature of emerging market (EM) classifications has resulted in FoFs in September 2013 using some 500 fund options to obtain their EM exposure. This reveals the difficulty FoF managers face in calibrating this particular exposure to reflect their outlook.
In September 2013 European FoFs continued to show a preference for broad-based EM funds. The 25 top fund options for September constituted nearly 40% of the €6bn that European FoFs held in global EM. A total of 11% of these assets was invested in Aberdeen funds, making Aberdeen the most popular active fund group by far in the top 25, followed by M&G and First State, which were also well represented. Investors in the EM space showed a predilection toward actively managed, broad-based funds, generally with passive options constituting the residual. Within the 25 top sellers only 8% of the overall assets for September were invested in passive products–a considerably lower percentage than for other regional classifications.
The problem of distilling specific exposure within EM was particularly evident in frontier markets. The total exposure to this subsector was only 3.1% of the overall holdings in EM. Goldman Sachs N-11 Equity Fund made an appearance at Number 14 in the popularity stakes, with 37 FoFs using it to obtain specific frontier-market exposure. Even though the number of FoFs was quite high, the average holding size was €2.3m, meaning the fund ended up with an overall investment of €73.1m–only 1.3% of the overall exposure by groups to EM. (It is one of only a handful of funds of its type in the sector.) BlackRock Frontiers Investment Trust (€17.6m) was held by 11 buyers; Schroder ISF Frontier Markets (€5.1m) also had 11 buyers. Templeton Frontier Markets (€66.1m) was the most popular fund in terms of number of holdings; the fund was held by 48 FoFs.
Passive representation in frontier markets was commensurately much lower; of the €183.0m held in frontier-market options overall for September, only €11.4m was held in the better-known frontier-market-tracker options. European FoF managers clearly were trusting active managers to better manage the liquidity and capitalization constraints faced in this area of the EM market.
This article first appeared in Citywire Global Magazine
