Morgan Stanley Comments On Emerging Markets

The Wall Street Journal has a video interview with Morgan Stanley fund manager Ruchir Sharma who makes a number of comments about emerging markets that relate to our recent post on those markets, and on India in particular.  Sharma notes that emerging markets are 40% of the global economy.  More relevant than that number is the fact that according to Morgan Stanley Capital International's Emerging Market Index, they only comprised 14% of global equity markets in 2010. 

Sharma suggests that after a hot decade, emerging markets have become a "mature asset class."  If that's true, then at 14% of global equity capitalization, there isn't a large playground for active fund managers to add value.  Equity investors became excited about India when economic growth accelerated from 5-6% before 2003 to 8-9% after that, driven by a first wave of economic reforms and liberalization towards foreign investment.  Unfortunately, as we've written, the economic reform wave has washed ashore and now government pronouncements express ambivalence and antipathy towards foreign investors. 

Sharma suggests that emerging markets may be like "shooting stars" rather than suitable homes for long-run equity investors, who require liquidity, stable tax policy, and a clear regulatory framework in order to comfortably capture any excess returns, which Sharma suggests may not be forthcoming in the future.  One website paraphrases Sharma as saying that India has lost the plot on economic growth.  This is very much in line with our recent post. 

Dimensional Fund Advisors Value I (DFEVX) fund is the largest emerging markets mutual fund, according to Morningstar data presented in the New York Times, at $16 billion in assets, held in 2,235 positions with an expense ratio of 0.61%. This seems like a potentially attractive way for an individual investor to participate in the emerging markets, but DFA funds are available only to investors who sign up with a dedicated DFA advisor.  Other emerging markets funds have expense ratios up to 1.25% which is too much to pay.