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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.

DGS currently sports a 30-day SEC yield of 4.17%. Taiwan, Thailand, and South Korea combine for almost 44% of that fund's country weight. DEM has a 30-day SEC yield of 3.87%. Taiwan, China, Russia, and Brazil loom large in DEM, combing for over 51% of that ETF's weight.

When it comes to damping out emerging markets volatility, a theme that soared to the front of the ETF lexicon in 2012, Generation Asset prefers the $915.6 million iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSEARCA:EEMV).

With lower volatility relative to the MSCI Emerging Markets Index, EEMV has easily outpaced EEM and VWO over the past year. Fraszczyk does not foresee ETFs such as EEMV overshadowing flagship funds such as EEM and VWO, but he likes EEMV's utility in limiting the model's downside equity risk while delivering alpha.

EEMV's ability to skirt volatility comes almost as much by way of what countries are excluded from the ETF as what markets the fund does offer exposure. Prominent allocations to Taiwan, China and South Korea are arguably not surprising. However, the fund features no exposure to India and Russia represents less than one percent of EEMV's weight.

Another Prominent Theme Due to reduced correlations to US equities, improving credit ratings and sturdy government balance sheets in many developing markets, emerging markets bond ETFs soared last year, both in terms of assets gained and delivered returns.

Generation Asset's emerging markets fixed income holdings are the iShares JPMorgan USD Emerging Markets Bond Fund (NYSEARCA:EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY). Fraszczyk sees both EMB and PCY as currently being in strong uptrends. It is hard to argue with that assessment as EMB is up 17.1% in the past year while PCY has surged almost 22%.

Investors continue to pour cash into these products. In just over two months, EMB has seen its assets under management grow to $7 billion from $6.2 billion. PCY had $2.5 billion in AUM in early November, but that number was almost $3.1 billion as of January 18.

On the surface, it may appear that owning both EMB and PCY is duplicative, but these funds have noticeable differences at the country level. For example, EMB's top-five country weights are Brazil, Russia, Turkey, Mexico, and the Philippines. PCY's are Turkey, Croatia, Romania, Hungary, and Lithuania.

Generation Asset's current preference is for dollar-denominated emerging markets debt. However, the firm's model, which can be transposed across myriad regions with sufficient liquidity, can be custom-tailored to give clients exposure to local currency emerging markets bonds.

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