# **3 EMERGING MARKET PORTFOLIO INVESTORS**

# _3.1 THE UNIVERSE OF INVESTORS_

Emerging market investors are at the outset no different from investors in general. When we disregard bilateral and multilateral investors with explicit developmental objectives, the motives of international investors for investment into emerging markets are no different from the motives driving other investments: profitability and contribution to portfolio risk diversification. In broad terms, emerging market investors can be divided into the dedicated and the cross-over.<sup>1</sup> Within these groups, they are as diverse in size and type as the emerging markets themselves, ranging from individual investors to large institutions to hedge funds of various kinds. However, the number of active investment managers in this asset class is small when compared to the number of actively managed portfolios investing in especially the U.S. debt and equity markets, and there appears to be a high concentration of assets under management in relatively few market players.<sup>2</sup> We have found that the investability criteria vary rather systematically across general classifications of investor characteristics. In particular, the criteria can be differentiated according to the type of investment product they specialize in (equity or fixed income), the investment methodology (top-down or bottom-up) and the preferred currency (hard or local currency).

The most basic distinction we have observed is between portfolio investors looking at equity exposure and fixed income exposure. This first distinction mirrors the common way global investors take high-level asset allocation decisions by first dividing funds between equity, fixed income and cash, and then allocating each sub-component to different sectors and asset classes. Some of both the housekeeping and plumbing factors impacting the investability of a country are common to both equity and fixed income investments. These are typically high level factors assessing the overall political and economic environment or those determining whether a country is on the “cannot invest” list. As noted below, other factors have a more specific impact depending on the type of investment, i.e., whether debt or equity, whether sovereign or corporate. There is a tendency for equity investors to have a more elaborate set of minimum requirements for investments, especially within the plumbing category, than fixed income investors. This is not surprising as equity investors are, in general, more exposed to the quality of domestic financial systems and infrastructure than fixed income investors, as only a limited set of companies have equity products (such as cross listings, ADR’s or GDR’s), which trade and settle outside the local markets. However, as fixed income investors go down the credit curve from government to corporate credits and from hard into local currency this distinction gets less pronounced.

The type of investment methodology used by investors can also determine the key investability

> 1 Cross-over investors are investors without a pre-commitment to invest in any particular asset class.  Their investments are often only constrained by minimum rating requirements, and their movement into emerging market assets is opportunistic in nature.  Cross-over investors typically invest in the higher grade emerging market countries and assets, and are most often absent from the asset class during periods of crisis.

> 2 See Nelson's directory of investment managers for a description of US investment managers.

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