Finicky pension funds flee emerging markets

Investors have pulled more than $5.5b from bond markets since mid-April

You wouldn’t expect pension funds to sell in a hurry. But that’s exactly what they’re doing now in emerging markets, according to Mark Mobius.

Patient as they are, pension funds are also famously riskaverse, said the 81-year-old investor who set up Mobius Capital Partners LLP after leaving Franklin Templeton Investments this year. That’s pushed them to cut risk all around, selling in both developed and developing countries, he said in a phone interview.

“More and more of these pension funds are buying ETFs and when the market goes down, the tendency for them is to reduce,” Mobius said. “You have a strange situation in that although they may tend to be long-term investors, they want to get out and be safe.”

That’s bad news for emerging-market bulls who had been touting enhanced interest from US pension funds as a backstop against sustained losses in emerging equities on the grounds the funds don’t buy easily, but once they buy, they don’t sell for a long time.

If Mark Mobius is right, that hope has been belied in the current sell-off. Investor nervousness is becoming more visible: developing-nation stock volatility is surging the most since 2000.

Investors have pulled more than $5.5 billion (Dh20.18 billion) from bond markets since mid-April, according to the Institute of International Finance, as the rise in the US dollar and yields curbs appetite for risky assets. It’s a marked shift for emerging markets, which enjoyed a two-year rally that boosted stocks and a gauge of currencies to the highest level since at least 2007.

“In the big bull market you had in the US for so long, being in ETFs was very gratifying for a lot of these institutions, but just when things turn and everybody tries to head for the doors at the same time, you can have really big volatility,” Mobius said. “That is one of the reasons why you have the volatility.”

Last year, institutional money flows into emerging-market equities almost tripled, boosting their total net assets for equities to $318.6 billion as of the end of last year, according to data from Morningstar. They ended 2017 with $192.7 billion worth of bonds, the data show.

Mobius says pulling out of emerging markets because of short-term volatility is the wrong strategy.