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* Emerging market mania once flabbergasted even specialists
* Pension fund wanted to put most of its money in high-risksector
* Now emerging specialists slashing their businesses andjobs
* Barclays bank pulls out of Africa after a century
* Good emerging market firms dragged down with the bad
By Sujata Rao
LONDON, March 1 (Reuters) - After the dotcom bubble and theglobal credit crunch, it's the turn of the emerging marketsindustry to sink into post-boom soul searching.
The near mania that once flabbergasted even emerging marketspecialists is gone. Now many of the firms that grew to serveinvestors in the likes of China, Brazil or South Africa areslashing their businesses and jobs, with more cuts to come.
If proof were needed that global investors have gone offdeveloping economies, it came in Tuesday's announcement byBarclays that it is pulling out of Africa after morethan a century.
The British bank's African subsidiary insisted the decisionto withdraw under a makeover of the London-based parent did notrelate to economic sentiment on the continent.
But sentiment among investors in emerging markets generallyhas been souring for some time; in dollar terms, emergingequities underperformed their developed peers by around 50percent in the five years from the end of 2010.
Compare that with the mood just before the market peakedhalf a dozen years ago.
More adventurous investors had long poured into emergingmarkets (EM) - especially countries exporting then boomingcommodities - seeking better returns than in developed economieswhere interest rates were near rock-bottom. But to theastonishment of market professionals, even some pension fundmanagers - the traditionally ultra-conservative guardians ofpeople's retirement incomes - wanted to join them.
Devan Kaloo, head of emerging equities at Aberdeen AssetManagement, recalls a conversation he had with a Europeanpension fund in 2010: it wanted to put no less than 80 percentof its assets into a sector that a few years earlier had beenconsidered too risky for mainstream investors.
"I am an EM guy and I should have been jumping up and downand saying 'yes absolutely' but even I was thinking:'seriously'?" he said.
Kaloo advised against such a move, and the conversation withhis fund at least went no further. "I just hope they didn't doit," he added.
Kaloo runs one of the sector's most successful funds; itdelivered average annual returns of almost 20 percent in thedecade after its 2003 launch, far outpacing the underlyingemerging index. But some time after the 2010 conversation, Kaloo"soft-closed" his fund - not marketing it and charging newinvestors extra fees upon entry.
"EM became so much in vogue that we had investors coming tous who perhaps didn't understand the asset class; they looked atour track record and extrapolated that forward. We wanted torebalance the book and to better cherry-pick clients," he said.
Little did they know but emerging equities' boom decade wasdrawing to a close. Having risen more than 200 percent from2001, the main index run by MSCI fell 35 percent in thesubsequent five years.
Kaloo's fund has not been spared as investors fled theproblems of emerging markets - such as diving oil prices forenergy producers from Nigeria to Russia or political infightingin the likes of South Africa - and returned to developed marketsin the hope of reviving returns.
Its assets under management (AUM) are down to $5.1 billionfrom $16 billion in 2013. Aberdeen Asset Management's overall AUM fell by $30 billion last year, mainly due to its EM-heavyprofile.
Across the industry, $26 billion fled emerging equity fundslast year, according to Boston-based EPFR Global, a sizeablechunk of the net $153 billion inflows received between 1996 whendata tracking began and now.
Most of this is down to small investors but the downturn isalso testing the patience of pension and insurance funds, mostlylate arrivals to the EM party who had been lured by the juicyreturns earlier entrants enjoyed.
The losses go beyond equities. EM debt funds tracked by EPFRsuffered $32 billion in redemptions last year; more emergingmarket bond funds closed than were launched in 2015, accordingto Lipper, the first time this has happened since it begancompiling data in 2006.
On top of investors themselves, their advisers have alsobecome cautious. "There is what I call double risk aversion -there is natural risk aversion, plus the financial adviser hasan increased risk of being fired," said Peter Preisler, head ofglobal investment services for Europe, Middle East and Africa atT. Rowe Price.
More pain probably lies ahead because it usually takes atleast 8-10 quarters of negative returns to affect the bigger,diversified funds seriously, says Shiv Taneja, principal atMarket Metrics, which provides data to the asset managementindustry, adding that there was still "fat in the system".
BANK RETREAT
Global banks, struggling with sluggish home economies, hadfanned out across the world in anticipation of dealmaking andresearch fees. Hopes were also pinned on mortgage and creditcard sales to the millions of Brazilians, Nigerians and Indianswho were expected to join the middle classes.
This paid off for a while, particularly with underwritingnew share sales (IPOs) in the developing world.
With jumbo deals such as Agricultural Bank of China's $22billion IPO and Santander's $9 billion Brazilian debut, equitybankers' fees topped $6.3 billion in 2010, a six-fold rise from2000, ThomsonReuters data shows. This fell to $4 billion in2015, or $1.2 billion if China is excluded.
The shift is forcing lenders to retreat, closing officesoverseas and routing activity back through London or New York.
Global job cuts just between June and December last yearamounted to 130,000 at the top 10 European banks, double the2013 and 2014 losses, according to data compiled by Reuters.Much of this centres on emerging markets business.
Barclays, for instance, is also selling its Asian privatewealth business and radically cutting its investment bankingoperations across emerging markets.
Promising overseas ventures have soured; at StandardChartered, balance sheets have been dented by risingloan losses in India, once a highly profitable market. The bank,which plans to axe 15,000 jobs, has just posted its first annualloss since 1989.
Amid the general jobs carnage, it is hard to quantify lossesspecifically on emerging market trading desks. But data fromCoalition, an industry analytics firm, offers clues. Based onreporting by the top 10 global investment banks, it estimatesEastern European, African and Middle Eastern bond and currencytrading desks are down over a hundred personnel since 2012.
"A huge industry grew up around EM but the mistake peoplemade was in thinking the story was secular, rather thancyclical," said John-Paul Smith, founder of the EclecticStrategy investment consultancy.
Smith, who has worked as a fund manager at Pictet and inequity strategy at Deutsche, called the end of the emergingequity cycle in December 2010, advising clients to sell. Somefund managers emailed to ask if he was joking, he recalled.
Consultants who urged pension funds and insurers todiversify into emerging markets just as the boom peaked are alsoto blame, he said.
GOOD, BAD, UGLY
One problem is that anticipated improvements in public andcorporate governance did not happen in emerging markets and mostsuch countries made little effort to reduce their dependence onexports of commodities, prices of which are plunging.
Late last year, Martin Taylor, founder of the $1.5 billionNevsky Capital hedge fund, closed his vehicle, telling clientsthe decision was partly because economic data from countriessuch as China and India had become "less transparent andtruthful", complicating investment decisions.
Many also blame the nature of the emerging markets classwhich lumps together disparate countries into indexes used byfunds to guide investment and benchmark performance. This canmean emerging markets - good and bad alike - tend to rise andfall as a bloc.
Kaloo said even well-managed, profitable companies inemerging markets are now being punished.
Investors do seem to be differentiating more betweencountries, said Greg Saichin, head of emerging debt at Allianz,but the benchmarks still unite "the good, bad and ugly".
Saichin reckons flexible strategies not tightly tied to thebenchmarks are the way forward.
"Emerging markets rode high on back of the commoditysuper-cycle and monetary accommodation, no questions asked," hesaid. "But now people are asking questions." (Additional reporting by Claire Milhench in London and SumeetChatterjee in Mumbai; editing by David Stamp)
