When Robert Holderith, a former UBS executive and ETF investment expert, set out to establish a new asset management firm from scratch, he says he knew the workspace needed a creative touch.
Today Holderith's startup firm, Emerging Global Advisors, occupies a busy office in New York City's Chelsea neighborhood, where a handful of staff sit in one open-plan, cubicle-free room. The setting allows everyone from the firm's executives including Holderith and Chief Executive Marten Hoekstra, former CEO of UBS Wealth Management Americas to the national sales manager and staff to hear each other's conversations.
That frequently includes the calls that sales representatives make to clients. The question, "If we could build an [emerging markets] ETF for you tomorrow, what type of ETF would that be?" is a common inquiry, Holderith says. And that chatter among clients and employees, he says, is what can lead to the next investment idea.
That flexible approach to new product development, says Holderith, gets much of the credit for the firm's early successes including a suite of emerging markets ETFs that helped the firm surpass $1 billion in assets under management in December. Clients range from wirehouse financial advisors to registered investment advisors, but all want the same thing for their clients: to provide access to the areas most poised for growth in the emerging markets.
Emerging Global Advisors aims to differentiate its products from other emerging markets ETFs by striving for the same approach that investors take to developed markets drilling down on specific sectors and themes, such as consumer growth and dividends. That sometimes means working to design their own indexes to base the firm's ETF products on, rather than heeding to the MSCI Emerging Markets and FTSE Emerging indexes that track market capitalization-weighted broad benchmarks.
The firm's efforts come as amid a growing interest in emerging markets, which are expected to be a global bright spot this year. But ETFs are still not the preferred method for accessing emerging markets growth, as a December Merrill Lynch Global Wealth Management report shows.
That Merrill Lynch report foresees positive long-term cyclical and secular forces in emerging markets, and recommends using active managers to take advantage of the expected surges in spending and expansion of the middle class expected in the years to come. Emerging markets ETFs, according to the report, commonly err by focusing too much on commodities, infrastructure and materials.
ETFs that are weighted based on market capitalization also put too much emphasis on developed opportunities, says Lisa Shalett, chief investment officer at Merrill Lynch Wealth Management, who co-authored the report. "The problem is in rapidly growing economies and economies, where the mix is shifting very rapidly, market cap weighted indices can very often miss the future because they're based on the past," Shalett says.
With its suite of emerging markets ETF products, however, Emerging Global Advisors aims to overturn those perceptions.
At first blush, Holderith and Hoekstra might not be the most obvious candidates to lead a startup investment firm.
Holderith first delved into ETFs about 12 years ago at UBS, where he ran the firm's discretionary platform, Portfolio Management Program, and helped the firm's advisor force gain access to markets outside of the U.S. through ETFs. He also used ETFs as a strategy to get access to different asset classes in another role at UBS, helping advisors with client acquisition and asset allocation. He went on to run sales at ProShares ETFs from 2006 until 2008, when he founded Emerging Global Advisors.
"I'm an entrepreneur," Holderith says. "If you're an entrepreneur, you're always looking at opportunities and you're trying to listen to what people need. And when that need looks big enough that you think it's worth it to take the risk, to take it on yourself, you make the decision to go for it."
Holderith tapped Hoekstra to join Emerging Global Advisors in 2011. The two originally became acquainted at UBS predecessor firm PaineWebber, where Hoekstra had a hand in hiring Holderith.
"I had a presupposition that because I liked navigating big firms, that that's what I should do," Hoekstra says of his transition to Emerging Global Advisors. "I ultimately realized that all the things that I actually cared about accomplishing are neutral to size."
The firm now has about 20 employees, but its goals are far reaching. Both Holderith and Hoekstra say they're not aiming to make believers out of advisors who shun emerging markets. Instead, the firm works to help those advisors who may have a 10% emerging markets allocation in their own portfolios to help clients embrace a level beyond 3% to 4%.
To help make that sale, Emerging Global Advisors draws from its portfolio of 22 ETFs targeting emerging markets with core, sector or thematic focuses all based on its own investment philosophies.
The ETF products, called EGShares, do not adhere to capitalization-weighted benchmarks such as the FTSE Emerging Index or the MSCI Emerging Markets Index. Instead, Emerging Global Advisors actively helps design the indexes it uses for its products. Following this approach, the thinking goes, helps get away from the emphasis on developed markets and certain sectors such as financials, energy and materials, where ETFs based on the traditional benchmarks tend to sway.
When marketing its products, Emerging Global Advisors also works to educate would be customers about the opportunity in thinly traded ETFs. As new ETFs emerge, they have no volume or trading history. Without trading about $1 million per day, Holderith says as an example, financial advisors might not think the fund has enough liquidity to invest. But what those advisors should really be focusing on, Holderith argues, is the liquidity of the underlying companies that comprise the fund, and the potential investment opportunity.
"The single most important piece of the ability to trade a thinly traded ETF is to know who to call, who your trading resource is, internally, at your firm," Holderith says.
Emerging Global Advisors' largest fund, the Emerging Markets Consumer (ECON), had $787.22 million in assets as of press time. The fund is an example of the firm's strategy for creating new products by listening to the problems articulated in the market, Hoekstra says. It aims to offer more exposure to consumer growth in multiple emerging markets countries, rather than focusing on the energy and financial sectors.
"A lot of their holdings are the beverage companies, the brewers, the food companies - all of which will benefit from a growing middle class in emerging market countries," says Patricia Oey, a senior analyst who specializes in passive fund research at Morningstar. "That fund has some high-quality companies, as many of these firms tend to be the dominant player in their local markets or regional markets."
The fund's closest competitor, she explains, is the iShares MSCI Emerging Markets Consumer Discretionary ETF, or EMDI, which has a different emphasis. "EMDI has a heavy 30% weighting in South Korean companies, many of which are exporters such as Hyundai Motor, and are therefore more exposed to global growth trends," Oey says.
Another ETF that Emerging Global Advisors counts among its best-performing funds is the Low Volatility Emerging Markets Dividend (HILO), with $87.45 million in assets as of press time. True to its name, the fund targets emerging market stocks that are less volatile, for financial advisors and investors who want to raise their emerging markets allocation but with less volatility.
Emerging Global Advisors' products also includes several new funds launched in the second half of last year. That includes Beyond BRICS (BBRC), aimed at developing countries beyond the usual suspects (Brazil, Russia, India and China); Emerging Markets Domestic Demand (EMDD), which targets five sectors the firm has deemed as most poised for organic growth (consumer discretionary, consumer staples, health care, telecom and utilities); and Emerging Markets Core (EMCR), which follows the S&P Emerging Markets Core Index and aims to incorporate less mature investments than traditional emerging markets benchmarks.
The products are aimed not only at letting financial advisors help clients diversify their emerging markets exposure, but also helping change the conversations about investing in those regions.
"Right now, if you're an advisor that says, 'Your [emerging markets] portfolio yields 2%, maybe you want more of a total return to come from yield or income' nobody is saying that to [the client], and so you're differentiated," Hoekstra says. "Or, said differently, 'Your [emerging markets] portfolio contains only 12% consumer exposure. Have you thought about raising that by half?' No one has said that to them."
Transitioning to ETFs
One Emerging Global client, Morgan Stanley Wealth Management financial advisor David Beyer, uses mobile phones as an example to talk about emerging markets growth. He has an office phone, a fax machine and a BlackBerry with him at his office, and then at home he also has another two phone lines and fax machine. In China, however, he says there is one mobile phone for every seven people.
"I think the growth is really outside the United States, in terms of people who don't have cell phone lines," Beyer says.
Beyer, who practices together with financial advisor Mitchell Stein in New York City, the Beyer Stein Group, say that those kinds of examples help their high-net-worth and ultra high-net-worth clients see the investment opportunity in emerging markets, despite the volatility risk.
Another investing opportunity their clients see is happening in Brazil, which will be hosting the Olympics and the World Cup. "They see the infrastructure spend and they see the commodity move," Stein says. "Our clients have been very receptive to having us overweight in that area."
But finding the best ways to access the emerging markets has been a work in progress over years, says Beyer, who served as a financial advisor at UBS for 20 years before moving to Morgan Stanley more than three years ago.
Beyer began investing in the emerging markets in the 1990s, when there were just two or three mutual funds available as investing options, Beyer remembers. About a decade ago, after the emergence of indexing, Beyer and his practice turned to ETF portfolios.
Beyer worked with Holderith at UBS, and says he found the two were "kindred souls" when it came to using ETFs to invest clients' money, particularly at a time when many wirehouse firms did not subscribe to that idea. Later, working with Holderith and Emerging Global Advisors became an obvious fit, Beyer says.
"We were able to customize portfolios and be more tactical," Stein says. "There wasn't the research at the time to help create a tactical portfolio within that geographic area."
Today, emerging markets account for 15% to 20% of the stock side of a portfolio, on average, for the Beyer Stein Group's clients. The group still uses a core position in the Vanguard Emerging Market Index Fund (VWO), while delving into Emerging Global Advisors ETFs to add alpha to those portfolios. "We have probably two to three of their ETFs in a portfolio at a time," Stein says.
Vanguard's flagship emerging markets fund, which has 100% exposure to the emerging markets, is one of the biggest players that Emerging Global is facing off against. Vanguard also has other ETFs on the market with various levels of exposure to emerging markets, points out Vanguard Senior Investment Strategist Jim Rowley. Among them are the Vanguard FTSE All-World ex-US ETF (VEU), focused on international mid- and large-cap stocks, with about 25% to the emerging markets, and the Vanguard Total International Stock Index (VXUS), focused on large, mid- and small-cap stocks outside of the U.S., with a 23% weight toward the emerging markets.
"We're certainly hearing more buzz about areas such as frontier markets and how to tap the emerging market consumer," Rowley says. "What's important to note as an investor is that as the global economy becomes more integrated, you have companies all over the world ... that are tied into the global economy and therefore tied into emerging markets and their consumers."
Emerging Global Advisors expects that ETFs will be just the beginning: Holderith and Hoekstra plan to expand into a broader asset management firm focused on emerging markets. In the first half of this year, Emerging Global Advisors will launch its first non-ETF institutional products. Those products, like the firm's existing ETFs, will be inspired by client need and, the firm hopes, ultimately help advisors expand their practices.
For Hoekstra, that means an education component: enabling financial advisors and registered investment advisors to provide their clients with new, smart advice on emerging markets.
"That's still possible," Hoekstra says. But there's a specific window of opportunity, he cautions.
"When people have ... the same conversations about emerging markets that they have about [developed] markets," he adds, "then you'll know that we can't differentiate anymore."