Emerging markets have been spiraling downward since the Federal Reserve began talking in May about “tapering” five years of quantitative easing. But don’t tell Bob Holderith, founder and president of Emerging Global Advisors, that his firm’s recent decision to shutter 12 of its funds is in any way related to the head winds that emerging markets are facing these days.
To the contrary, his New York-based emerging markets ETF firm, fueled by surging interest in its EGShares Emerging Markets Consumer ETF (ECON | D-42), has actually pulled assets in this year, at a time when the emerging markets in general have suffered outflows in excess of $6 billion. ECON now has more than $1 billion in assets and constitutes almost 75 percent of Emerging Global’s $1.4 billion in assets.
Holderwith told IndexUniverse Staff Writer Hung Tran that ECON’s success is emblematic of an emerging markets investment world that’s moving away from broad strategies such as the Vanguard FTSE Emerging Markets ETF (VWO | B-86 ) and gravitating toward funds that also span the globe but have finely focused themes, like growing internal consumer demand.
IU.com: Congrats on ECON and its third anniversary.
Holderith: We are absolutely thrilled. We think consumers are the key driver in EM. We’re happy to be first to market with it and that it’s been so successful and that people have embraced it. If you look at ECON’s performance—and obviously, we don’t know what it’s going to do tomorrow—it’s acted very, very well.
We continually talk about investors who are more discerning about their emerging market exposure. In other words, they’re not just buying the all-country, all-sector index. They are looking into what the themes and the drivers are and focusing on what they think the best opportunities are.
ECON is one of the number of ways we represent that opportunity. So, obviously, we have the Beyond BRICS ETF (BBRC | F-42) and we have domestic demand, which is kind of even above ECON as far as the concept goes. We think ECON represents well what our firm’s trying to say, which is you can be more discerning about how you choose your emerging market exposures and, if you have the right exposure, it can be a benefit.
IU.com: What makes the fund so attractive to investors?
Holderith: I think consumers are the biggest growth story for investors right now. There are estimates that the emerging market consumer will spend $20 trillion in 2020. And by 2030, maybe $30 trillion. So, if Investing 101 means following the flow of capital, I don't know of any other story that has that type of capital flow.
The design of the fund is simple: It’s diversified by country across the emerging market consumer goods and consumer services sectors. It’s a simple story to understand. So I think that's part of it as well.
And I think the third point, which you can’t count on, but what had happened so far, is that it’s performed very, very well versus emerging market indexes.
IU.com: Looking at ECON’s fact sheet, some of the fund’s biggest exposures are in Mexico, South Africa, Brazil and India, and some those countries are currently experiencing massive amounts of civil unrest, as with Turkey and South Africa. Then you have India, with the rupee spiraling downward and China in the midst of a slowdown. What sort of trends are you seeing in those countries, and how is the fund positioned to take advantage of those opportunities?
Holderith: Other than Mexico, there has been social unrest and the currencies have been affected because of that social unrest. Despite ECON’s relative overweight in those countries, the consumer companies have done so well up to this point that they’ve more than offset our overweight. In other words, the currency effect has been less important than the fact that the consumer continues to spend money and support the companies that are in this fund. So yes, they're having currency issues, but despite that, ECON has done very, very well.
IU.com: Are you going to drop fees or make any changes to the fund itself?
Holderith: There are break points in fees. So it’s 85 basis points for this first billion and it’s 80 basis points for the next billion and then it’s 75 after that. So we’ve actually added some break points. But since it’s over $1 billion, people are already experiencing a slight discount in fund fees.
IU.com: Can you touch on some of the other stuff you’re working on, such as “ACON,” the EGShares EM Asia Consumer ETF, that’s still in registration?
Holderith: I don’t want to say ACON is ECON’s little brother, but it clearly is a derivative of the ECON concept, and it’s focused on a part of the world where it’s possible that the growth there may be faster than other parts of the world. So, ACON has exposure to just six countries: India, China, Thailand, Indonesia, Malaysia and the Philippines.
So we believe that GDP growth there could be higher than in the rest of the emerging markets.
There are a lot of clients that have read a lot of research about the Asia consumer specifically. And since there's little Asia exposure in this line—in fact, you can see India's 10 percent and Malaysia and China, so those three combined are just less than a quarter of the ECON fund—clients have asked us to come out with that fund as well.
IU.com: Finally, can you comment on the firm’s recent closing of 12 of its funds and how they may or may not affect Emerging Global’s bottom line?
Holderith: They were 4 percent of our assets and, therefore, 4 percent of our revenue. so they will certainly not have a material impact on our business. It’s fairly expensive to run a fund, so eliminating those costs will have a positive impact on our business.
We are definitely moving out of offerings towards the smarter-beta area, or where the AUM momentum is. Closing funds shows that, sometimes, unmet investor needs do not equal investor demand. We still believe it makes sense for investors to have access to emerging market sector ETFs, but obviously, there is currently little to no demand for it.