Emerging-markets rebound hasn't convinced everyone

Investors in May drove the most money into emerging markets in 20 months but at least one fund manager is waiting for more volatility before he's completely bullish. “A lot of people ran away from emerging markets, the values improved and they came back,” said David Rolley, who helps lead global-fixed-income strategy for Loomis Sayles & Co. “Volatility is at a record low [across stocks, bonds, commodities and currencies]. Investors get braver, particularly the one that have to borrow money.” “I have to worry about a spread bear market in emerging markets,” Mr. Rolley said at the Morningstar Investor Conference in Chicago. He's buying short-maturity bonds from more reliable emerging-markets firms to avoid duration risk but also earn spread, or a yield premium. Investors put an estimated $44.7 billion into emerging-markets mutual funds and exchange-traded funds in May, raising the total over the last 11 months to $221.8 billion. May's total was the most since September 2012, when the latest round of quantitative easing was first announced, according to the Institute of International Finance Inc., which released the data this week. But the low volatility isn't helping, according to Mr. Rolley. He said low volatility is reducing term premiums and spread premiums. He's waiting for two triggers by the Federal Reserve that will increase volatility — the end of the bond-buying stimulus program and the increase, even small, of interest rates. An announcement that the Fed planned to taper the stimulus roiled markets last June and emerging markets saw outflows of $32.5 billion, according to the IIF data. That was an opportunity for fund managers to seize on the volatility, Mr. Rolley said. “Just talking about it gave us a more interesting entry level last year,” he said. Another portfolio manager said some investors have overestimated the risks to emerging markets from the taper. Justin M. Leverenz, director of emerging market equities for OppenheimerFunds, said he disagrees with an investment thesis called the “fragile five,” coined by Morgan Stanley, that suggests that Indonesia, South Africa, Brazil, Turkey and India are particularly threatened by tapering. He said the developing world has fundamentally changed since the 1997 Asian financial crisis. In his view, countries such as Russia are slowly but surely making structural improvements while the developed world struggles with slow growth, unemployment and other economic problems. Still, the overall economic picture of the countries is not synonymous with their potential as investment markets, Mr. Leverenz said. “You can't confuse macro growth with companies,” he said. “You need to invest in extraordinary companies and not get bothered about where they're domiciled.”