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EM ex-China equity strategies on the rise

Oksana Patron19 October 2023
Emerging markets pen and map

There has been a growing number of asset managers running the Global Emerging Markets (GEM) ex-China equity strategies which are expected to provide a good opportunity for those investors who are reconsidering their long-term portfolio strategy, according to bfinance’s report.

The research has identified 45 asset managers who run the GEM ex-China portfolios, a significant increase from just three in 2017, and close to 100 others considering doing so.

China, which still represents 30% of the MSCI Emerging Markets index and is by far the largest country constituent, currently faces fundamental challenges, including a troubled property sector, high local government debt, a growing unemployment rate, a shrinking labour force and state interventions.

According to bfinance’s report, GEM ex-China strategies provided a lever with which to express positive, negative or neutral views on China and these strategies could complement a standalone China equity allocation – allowing for greater specialism – or provide an option for investors who wish to remove, actively manage or structurally reduce their exposure to China.

However, investors should exercise caution during manager selection as live track records are short, with only three strategies in existence for more than five years, and managers should appropriately deep research capabilities to build robust portfolios without China.

The report further noted while quoted fees were broadly similar to active GEM equity, ‘early bird’ and seed investor discounts provided significant opportunities for highly competitive fees.

Also, allocators casting a broad net could identify a large number of managers who were looking to enter the space and/or build assets, creating good scope for negotiating attractive terms.

“The rise of GEM ex-China strategies provides asset owners with an existing dedicated China strategy greater flexibility and control when it comes to managing their entire GEM portfolio,” Frithjof Van Zyp, Senior Director at Bfinance in Australia, commented.

Moreover, given the nascent nature of GEM ex-China strategies, asset owners can secure substantial fee discounts as seed investors.”




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