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Betting on Consumers in Emerging Markets, London Firm Takes New Approach to ETFs


Generation Asset Management uses a unique, systematic approach to investing in the developing world with the objective being superior risk-adjusted returns.


Editor's Note: This content was originally published on by The ETF Professor.

In the ever-expanding world of emerging markets ETFs, some diversified funds still sit atop this corner of the exchange-traded products universe. For example, the Vanguard FTSE Emerging Markets Index (NYSEARCA:VWO) and the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM) remain favorites of investors – both professional and retail.

Some investors choose to use an ETF such as EEM and VWO as their sole avenue for exposure to the developing world, but there are plenty of other worthy options when it comes to multi-country emerging markets funds.

In fact, one London-based asset manager is proving it is possible to use the likes of EEM, VWO, and related fare simultaneously, in one portfolio, to deliver impressive risk-adjusted returns. Generation Asset Management, a unit of Canadian hedge fund giant Arrow Capital Management, uses a unique, systematic approach to investing in the developing world with the objective being superior risk-adjusted returns in what is often viewed as a volatile asset class.

Generation Asset's model portfolio rebalances on a weekly basis and is 50% benchmarked to the MSCI Emerging Markets Index and 50% to JPMorgan EMBI Global Core Index. That means the model features both equity and bond ETFs.

In addition to VWO, which currently represents about 25% of the model portfolio's equity-based weight, Generation Asset is using other, less heralded emerging markets ETFs such as the EGShares Emerging Markets Consumer ETF (NYSEARCA:ECON). ECON is heavy on local brands that emerging markets consumers are most familiar with, not multinational brands that only derive a sliver of their total sales from the developing world.

"We strongly believe in the EM consumer story," said Generation Asset analyst Bartlomiej Fraszczyk. Emerging market consumers do most of their business with familiar local or regional brands, and tend to have less affinity for developed world brands. We believe domestic demand will be the main driver of EM economies growth."

Fraszczyk said Generation Asset views ECON's country weights in a favorable light. South Africa, Mexico, and Brazil combine for over 54% of the ETF's weight. Malaysia receives an allocation of 6.25%.

"Our observation is that over the period of the last three years, South Africa, Mexico, and Malaysia have consistently outperformed the MSCI EM Index," noted Fraszczyk. "We also like Brazil, India, and Chile as they display unique consumer growth themes. The point is, the ECON provides us with a perfect country allocation split."

Betting on Dividends, Damping Volatility A cornerstone of Generation Asset's rules-based model is capturing dividends while mitigating volatility. The dividend portion of the firm's model portfolio centers around the rapidly growing WisdomTree Emerging Markets Income Fund (NYSEARCA:DEM) and DEM's small-cap equivalent, the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEARCA:DGS).

"We like the fact that these ETFs are sizeable in terms of assets and offer good liquidity," said Fraszczyk. "We value the WisdomTree research development work and new products creation innovation. We have seen those two ETFs being successful so far and we believe the dividend space will continue to grow in 2013."

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