Tuesday, April 24, 2007

van Agtmael: Put 20% of your portfolio in emerging markets

Your neutral benchmark for stocks should include a 20% allocation to emerging market stocks, said Antoine van Agtmael in his April 23 speech on "The Emerging Markets Century" to the Boston Security Analysts Society. Twenty percent is roughly the percentage of global market capitalization accounted for by emerging market stocks.

Van Agtmael, the chairman and chief investment officer of Emerging Markets Management, wouldn't stop at 20%. He recommends raising your allocation by 1% annually. Your benchmark should be dynamic, he said. However, after a series of good years, you should skip a year of raising your allocation. Speaking of good years, emerging markets have enjoyed a strong run recently. Accordingly, van Agtmael would currently recommend underweighting emerging markets in your portfolio.

Consider companies outside the top 200

Van Agtmael recommended that investment professionals consider companies other than only the 1,000 included in the indexes. He noted that 90% of investments in emerging market companies are made into the top 200 stocks. That's a small percentage of the 15,000 stocks listed around the world.

Investment managers should look at what made the current leaders among emerging markets great. They should seek those same characteristics in what's likely to become the next generation of market leaders. For van Agtmael, those characteristics include:
  • Unconventional thinking about how to solve problems
  • A truly global mindset
  • An obsession with quality and execution

America no longer at the center

From a broader perspective, van Agtmael said that Americans need to lose their perception that we're the center of the economic universe. This is less and less true. Moreover, we are now in the midst of the biggest and greatest shift in the global economy and power since the Industrial Revolution. In some sense, it's a return to the world before the Industrial Revolution, when China and India were the world's largest economies, he said.

Van Agtmael's new book

Van Agtmael recently published The Emerging Markets Century: How a New Breed of World-Class Company is Overtaking the World.

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Blogger SusanW said...

Here are van Agtmael's comments on my post:

I read the draft of your blog. It correctly captured what I said. You may want to add that the indexes like the often used MSCI increasingly underestimate the size of emerging markets because they include so few stocks and adjust unfairly for "float".
As a result, investors believe they are "neutrally" invested when in fact they are not. And, as 2006 showed, new IPOs from China to Brazil are often the most dynamic part of the universe.

The 20% I cite does not adjust for "float" because this leads to a comparison of apples and oranges as so many shares in developed markets are "locked up" by institutional investors but still considered "float". It includes the Middle Eastern markets.

Thank you.
Antoine van Agtmael

1:33 PM  
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6:33 PM  

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