U.S. retail investors have gone way overweight in fixed income since the 2008 financial crisis, and could be missing opportunities in equities, particularly emerging markets equities.
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Miraflores, one of Lima's busiest shopping districts, is home to countless malls, restaurants and bars, such as this cliff-top complex, Larco Mar.
That was the argument made in the mid-year market analysis presented by two gurus from mutual fund giant OppenheimerFunds, chief economist Jerry Webman and Chief Investment Officer Art Steinmetz. Oppenheimer is one of the top 10 American fund managers, controlling about $150 billion.
Over the past six years, mutual fund investors have withdrawn a striking $500 billion from U.S. stocks, Webman and Steinmetz said. Emerging market equities have seen a modest inflow of $100 billion during that period. But the big gainer has been bonds, with $1 trillion pouring into this presumably safer asset class.
That means fixed-income investments tend to be overvalued and investors are poorly positioned for a global economy that keeps growing despite dire financial headlines.
The developing world has come out of the 2008 crisis not only with an ever-increasing share of global GDP, but also as the home of macroeconomic virtue, the Oppenheimer experts argued. Fiscal and debt profiles in the major emerging markets are generally far healthier than those of the richer countries.
And in the latest economic cycle, China (FXI, quote) and other emerging markets have shown they are nimble enough to react to changing conditions, for instance by cutting interest rates to maintain growth as the threat of inflation lessens.
The Oppenheimer executives, most of whose funds are actively managed, argued against buying into emerging markets through index-linked funds because indices are heavily weighted toward basic materials and energy stocks; two sectors that have seen the worst performance lately.
Growth has shifted to domestic consumption as the middle class grows rapidly in the BRICs and other big developing economies. That means attractive investments in technology, telecommunications, retail, and health care companies, which are underrepresented in indices because of their smaller market capitalizations.
Oppenheimer’s $24 billion Developing Markets Fund (ODMAX, quote) has lost 11.5% of its value over the past year. That is much better than the 18% decline in the popular iShares ETF that tracks the MSCI global emerging markets index EEM (quote). So maybe the active management is worth the extra cost.
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