Listed Emerging Market Companies - Having a Multinational Parent Makes a Big Difference, Aberdeen and Yale Find
PHILADELPHIA, Feb. 28, 2012 /PRNewswire/ -- As the debate continues about how best to gain exposure to the emerging markets growth story, last year Aberdeen Asset Management, the world's largest emerging market manager of closed-end funds(1), commissioned Yale University's Martijn Cremers to carry out a study on locally-listed EM affiliates of multinationals.
In his study, Cremers found that the share price performance of these listed affiliates was vastly better than that of both emerging and developed markets broadly as well as their own local markets.
There are 92 such companies across the emerging world. One of the sample companies highlighted in the study has listed affiliates in India, Indonesia and Pakistan in which it has stakes of 37%, 85% and 75%, respectively. Over the thirteen years from June 1998 to June 2011, a period chosen for its balance between sample size and history length, the listed affiliates of the sample company returned 2,229%. This compared with total returns of parents, local markets and parents' markets of 407%, 1,157% and 147% respectively.
This pattern of outperformance was consistent across each region. Affiliates in EMEA and Asia outperformed their local indices by 41%, 134% and 50%, respectively. Adjusted for volatility, the affiliates' performance was even better in some cases, as many of them demonstrated defensive qualities during the 2008/9 financial crisis.
These findings may contradict those who have argued the most effective way for investors to obtain exposure to emerging markets is through developed market companies. Since active managers in the emerging world generally underperform, such arguments continue, why not buy a multinationals ETF?
According to the research, this approach ignores important opportunities to earn significant returns from certain emerging markets companies.
It is true that returns from emerging markets as a whole have not been commensurate with their economic performance over the last 20 or so years. Over time, stock markets should in theory track economic performance. Although this relationship has held true in developed markets, it is much less evident in the emerging world. For example, from 1992 to 2010, China's economy, in nominal RMB terms, grew by 14 times but its stock market, as measured by the MSCI China index, did not experience comparable growth.
At a regional level too, a similar picture emerges. Over the last 20 years, real GDP growth of the Asia Pacific ex-Japan region has been around 4 percentage points higher than that of the US. However, over the same period, the MSCI AC Asia Pacific ex Japan index has performed pretty much in line with its US counterpart.
Paradoxically, we believe it is the strong growth of emerging economies that is the cause of the relatively poor performance of its equity markets. Many companies, mesmerized by the potential around them, invest large sums in new capacity, often outside their core area of expertise. A focus on top line growth rather than profitability tends to result in destruction of shareholder value.
We believe those emerging markets companies that have been very disciplined about expansion have tended to be the better performers over the long term. But discipline requires a strong corporate culture which can take decades to build. Unless, that is, you have a parent with a strong culture, i.e. affiliates of multinationals. Affiliates tend to adopt, explicitly or implicitly, their parents' business culture and corporate governance practices and with them a stronger focus on shareholder returns. Furthermore, the financial support from their parents, perceived or real, serves affiliates well in the good times, but particularly during the difficult times.
Martijn Cremers, Associate Professor of Finance at Yale School of Management, comments:
"Publicly-traded emerging market affiliates of large multinational corporations have shown remarkably good performance over the last 14 years. These affiliates combined high performance with lower volatility, outperforming both their local market and the wider emerging markets, but not at the expense of significant greater down-side volatility."
"The two main reasons for this outperformance are improved corporate governance and a stabilizing role of the parent companies. Both seem critical specifically in financial crises. These give affiliates a clear comparative advantage over their local competitors that should endure in the foreseeable future."
Peter Elston, Aberdeen Head of Asia Pacific Strategy & Asset Allocation, adds:
"While there will continue to be home grown success stories, the strong corporate culture of affiliates is a competitive advantage for the companies in this select group that is hard to ignore. Opportunities in emerging markets are perhaps more attainable than "stay at home" types think."
Martijn Cremers will be presenting on this topic at Aberdeen's Investment Conference on June 7, 2012 at Bloomberg in New York City. To download his paper ("Emerging Market Outperformance: Public‐traded Affiliates of Multinational Corporations") please click on the below link
Aberdeen is the Leader in Emerging Market Closed-End Funds
Aberdeen's subsidiaries (the "Aberdeen Group") have managed U.S. registered closed-end funds since December of 2000. In addition to being one of the largest pure stand-alone asset management houses investing in the Asia-Pacific region, the Aberdeen Group is the largest manager of emerging market closed-end funds offered around the world by both value and number.(1) Aberdeen manages more than $6 billion in closed-end fund assets for US investors as of December 31, 2011 and has total assets under management of US$270 billion.
The Aberdeen Group directly manages eleven U.S. exchange-listed closed-end funds, one Canadian investment company, and serves as investment sub-adviser to two other closed-end funds managed by First Trust Advisors L.P.
About Aberdeen Asset Management
Aberdeen Asset Management is the marketing name in the U.S. for the following affiliated, registered investment advisers which are wholly owned by Aberdeen Asset Management PLC: Aberdeen Asset Management Inc., Aberdeen Asset Management Investment Services Ltd, Aberdeen Asset Management Ltd. and Aberdeen Asset Management Asia Ltd.
The above is for information purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein. AAM does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials.
Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.
Closed-end funds have a one-time initial public offering and then are subsequently traded on the secondary market through one of the stock exchanges. The investment return and principal value will fluctuate so that an investor's shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund's portfolio. There is no assurance that a fund will achieve its investment objective. Past performance does not guarantee future results.
Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither Aberdeen nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.
Aberdeen reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice.
(1) Source: Fund Consultants LLC, July 2011. Based on analysis of emerging market closed-end funds offered in multiple jurisdictions as of June 30, 2011; data provided by Morningstar Inc. Closed-end funds are defined as investment companies that are 1) listed on a recognized exchange; 2) possess fixed share capital; and 3) were formed via subscriptions from the public via an open offer or placement. Criteria for inclusion in the emerging markets category is based on the World Bank's definition of emerging countries as measured by lower and middle income per capita.
SOURCE Aberdeen Asset Management Inc.