More Australian institutional investors are allocating to emerging markets and are increasingly doing their own homework on these markets, but allocation sizes have remained fairly static around 10 - 15 per cent of international equity allocations, according to Neuberger Berman.
"We have seen an increasing numbers of clients allocating to emerging markets, but whether the percentage allocations have increased for investors already there I'm not so sure," Neuberger Berman senior vice president Lucas Rooney said in an interview with Investor Weekly.
This is partly driven by the fact that Australian large companies are highly exposed to these markets.
"In the Australian shares portfolio, there is quite a high exposure to emerging market through BHP (Billiton) and Rio tinto, but super funds do more analysis on emerging markets," he said.
But Neuberger Berman global emerging market equities portfolio manager Conrad Saldanha said over the long term allocations would have to go up, because of the growth of these economies and their domestic markets.
"When we look at (global equities) portfolios in general, it is anywhere between 13 to 20 per cent," Saldanha said. "There is a big upside to that weighting."
"That is not going to happen in a linear fashion, but if you look over the longer term 10 or 15 years that is clearly where it is heading," he said.
Emerging market can be an elusive term, because many fund managers invest in companies that are not necessarily listed in these markets.
Saldanha said defines emerging market companies by companies which derive more than 70 per cent of either their profits or revenues from these economies.
For example, the fund invests in a South-African brewery that has its main listing on the FTSE in London, but derives 70 per cent of its revenues from emerging markets.
The fund is long-only and focuses on mid to small cap firms.
"The best opportunities tend to be away from the index, because it is not as well researched," he said.
The MSCI Emerging Markets Index includes three companies that have a market capitalisation of less than $1 billion, but the fund's universe has identified 3,358 companies in this sector.
Saldanha acknowledges that smaller companies are often associated with higher risk, but he said investors need to be aware of the survivorship bias in large caps and that it is more useful to look at a company's financial health.
Political instability in emerging markets has also become less of an issue, considering the crisis in Europe.
"Political instability has always been a problem, but these days it is not as much as an excuse when you look at what is happening in developed markets," Saldanha said.
The strategy has globally about $2.5 billion in funds under management and the firm has eight institutional clients from Australia in it.
Neuberger Berman has also been in the process of buying back equity from the estate of Lehman Brothers, which bought the firm in 2002, and is on track to be 60 per cent staff-owned by the end of the year.
The company expects to be 100 per cent owned by staff in 2016.
