Year: 2009

“Banks in Trinidad and Tobago are blessed,” says Sekou Mark. It may be an intriguing statement, given the current global economic crisis to which some of the biggest banks have fallen victim. More intriguing perhaps is that the man making the statement is a banker himself. He is the General Manager of Corporate Banking at First Citizens Bank, the highest rated indigenous financial institution in the English-speaking Caribbean (BBB+ Standard & Poor’s) and winner of the World Finance Award for Best Bank, Trinidad and Tobago this year.

Brandishing a broad smile and exuding a youthful confidence that speaks to his younger-than-average age for a top banking executive, Mark is sitting in his office overlooking the beautifully lush and serene Queen’s Park Savannah at the bank’s headquarters in Port of Spain. “We are blessed with a lot of liquidity which, in the current climate, can be a good thing but at times we have trouble trying to find places to invest that liquidity,” he goes on to state. It’s evident from that far from bemoaning the present state of the international banking sector, Mark is instead excited by the prospects of new opportunities and grand new projects for First Citizens over the coming months.

But what about the fact that Trinidad and Tobago has experienced some effects, albeit delayed, of the economic downturn? Local energy companies have suffered from reduced demand and fluctuating gas and oil prices, which have directly impacted their bottom line and led to significant job cuts. Local manufacturers who export to the many tourism-based CARICOM nations have seen orders dry up as foreign arrivals have slowed. Those that export to the US and UK faced markets that were pre-occupied with ‘buying local’ in order to save their own economies.

As far as the local financial sector goes, things weren’t looking too bright either. The collapse – and subsequent bailout – of the CL Financial Group by the Trinidad and Tobago Government sent shock waves across the Caribbean Sea, not least because the conglomerate’s four largest financial institutions were responsible for assets valued at more than 25 percent of the country’s GDP. The group was considered a Caribbean success story and had developed into the region’s largest privately owned corporation with subsidiaries in over 32 countries.

In spite of the doom and gloom forecast by pundits around the globe, Mark and his colleagues at First Citizens seem surprisingly upbeat about potential new prospects throughout the Caribbean and Latin America. Trying to grow a business in new markets in the middle of a global recession is quite a daunting task. But if there is anyone who can spot a silver lining in what must be the largest and darkest raincloud in almost a century, Mark is that person: exuberant yet measured in his remarks, and completely driven towards the accomplishment of the institution’s vision.
 
An orange lining
The first bright spot to come out of the CL Financial collapse was the acquisition of CMMB (Caribbean Money Market Brokers). Established in 2000, CMMB has become the largest full-service brokerage house in the Caribbean, managing assets of over $1.1 billion and recording profits of $11.1 million in 2008.

With headquarters in Trinidad and offices in Barbados, St Lucia and St Vincent and the Grenadines, CMMB has single-handedly created a vibrant secondary equities market, and has stayed true to its mission to ‘create, develop, educate and nurture the capital markets of the region’. Its distinctive orange branding and unique, free-thinking culture have allowed the company to carve out its own niche and attract a very loyal group of investors and staff.
Mark is clearly excited about the acquisition. “CMMB presents a great opportunity for us at First Citizens and one in which we have been interested in for quite some time. They have a great business model, a robust research arm and are young, energetic and entrepreneurial in spirit.”

When the largest full service brokerage house joins the highest rated indigenous bank in the English-speaking Caribbean, the result is synergy in every sense of the word. Each party brings something different to the table, they complement each other and are both excellent at what they do.

As far as Mark is concerned, First Citizens is the key to helping the brokerage firm realise its full potential. “In order for CMMB to blossom, the organisation needs two things: a ready and cheap source of funding. We can provide this.” With a capital base of $4bn, a capital adequacy ratio in excess of 18 percent and recorded profits at the end of fiscal-year 2008 of about $80 million before tax, First Citizens is well positioned to provide support if needed. But what does the bank get out of this deal? A strong, stable, well-respected brand with a loyal investor base and, most importantly, a presence in other Caribbean territories.

Although First Citizens has recently been involved in a number of landmark projects across the region including Sandals Antigua, Jamaica Energy Producers and LUCELEC (the St Lucian energy provider), in addition to a number of ventures in Barbados, it has generally kept a low regional profile. For Mark and the Corporate Banking Unit, the strategic alliance with CMMB translates into a regional network that provides opportunities to leverage the presence, contacts and on-the-ground expertise in these locations in order to discover new sources of business for the Group, so that in time First Citizens will become top-of-mind for large scale corporate and capital markets transactions in the Caribbean.
 
Why not First Citizens?
“We have the capabilities to compete on a global scale. We have a strong balance sheet, the liquidity we mentioned earlier, and a nose for credit – our delinquency ratio is consistently less than one percent compared to an industry average of three percent. We have proven ourselves in the local market and it is incumbent on us to grow the bank beyond the shores of T&T,” he retorts.

As he continues to speak, the justification for Mark’s confidence becomes apparent. “There are a lot of opportunities coming out of the recent global crisis that we are prepared to seize. Quite a number of very solid companies have lost access to good financing and have had their lines of credit pulled… good companies with positive cash flows and strong management that have become ‘victims’ of the downturn. We can provide what they need. If there ever was a time to make an impact and gain a foothold in a new market, this is it.”

Entering new markets is a bold move, but one which is not alien to First Citizens, which pioneered ATM and e-commerce in the Caribbean. It is countered by a measured approach to assessing clients and projects. “We have to be comfortable with the people we are working with, their track record, the regulatory and legal framework, the nature of the project, its viability and the social and economic impact.

“At the end of the day, yes, we look at the numbers but we also look at the people. Businesses will have ups and downs but at the heart of good relationships are good people. There is very little difference among the products that many banks offer. But there can be great differentiation and we set ourselves apart by the importance we place on human connections and our commitment to building strong relationships. Whether it is retail or corporate banking, a fixed deposit of $2,000 or a $200 million syndicated loan, it is the knowledge of our clients and mutual trust we enjoy that pay dividends over time, and which lead to success.”

This is the more culturally acceptable approach to conducting business in Latin America. Prior to joining the First Citizens Group in September 2008, Mark worked in Latin American and Caribbean markets during his tenure at the Inter-American Development Bank. There he was responsible for assessing the feasibility of and financing major infrastructure projects in the region.

With years of experience, a passion for the culture and a Blackberry full of contacts eager to do business with a progressive bank such as First Citizens, it’s no wonder that Mark chose Costa Rica as his point of entry into Latin America. Spurred on by the stable economy, the government’s progressive environmental outlook and the solid guarantees associated with financing major infrastructural projects – from power plants to toll roads and beyond – Mark considers it an ideal environment for First Citizens to establish a foothold in Latin America.

It is apparent that First Citizens embodies the resilient, ambitious spirit of Trinidad and Tobago. This spirit motivated the island to host the fifth Summit of the Americas this year, and to host the Commonwealth Heads of Government Meeting in October. Whilst many other organisations have become stagnant or retreated, this bank is moving ahead with purpose into new worlds, full of possibility.

For further information tel: +868 624 3178;
email: sekou.mark@firstcitizenstt.com;
www.firstcitizenstt.com

Size, says Margrit Schmid, is not the only criterion for success. But it does help indicate just how well a company is doing in its chosen marketplace. “In terms of premium volume, we are the leading global employee benefits network,” she says. “While size is not everything, our size does reflect how many multinational companies entrust their employee benefit solutions to us.”

Clients looking for answers to their employee benefit problems do not come to Swiss Life Network just because it is big, of course. Among the important pillars for Swiss Life Network’s success, Schmid says, are its totally customer-oriented and experienced multilingual employee benefit experts, and its modular system of solutions, which allows companies to determine the best plan to match their needs and risk appetite. “We offer best-in-class employee benefit solutions, which also include administration,” she says. “Our solutions include managing pension funds for multinational companies and providing large companies with captive solutions. Every client has a single point of contact within our organisation, which coordinates and organises all their benefit needs around the globe. Naturally, this is in close co-operation with our local network partners, each of which is a leading life and pension provider in their market. In every case, optimal and efficient administration is part of our solution.”

This network of local partners is an essential part of Swiss Life’s ability to offer companies global employee benefit schemes. “We work closely with our local partners who, like us, use state-of-the-art technological support to ensure the highest quality service,” Schmid says.

Beyond borders
In a world where state medical provision, state pensions, and state benefits vary so greatly between countries, inevitably national differences affect benefit plans across borders among an international corporation’s workforce, an issue that particularly affects expatriate workers. Companies need to ensure that they are fair to both expatriates and the local employees they work with. Here, Swiss Life Network can help. “Even within the EU we have 25 different social and labour laws,” Schmid says. “We base our solutions on best-in-class local solutions that are fully compliant with local laws, and attractive and competitive in the local environment. We then group these into a global solution that provides corporate headquarters with transparency and information. This includes regular reporting, and allows cost optimisation of risk coverages through multinational pooling.”

On the global level, a degree of equality in employee benefits across countries can still be achieved. However, this is through providing employees worldwide with the same categories of benefits, and not necessarily with the same level of benefits.

“Adequate solutions for expatriates are a special challenge. It is important for expats to ensure they have a solution that bridges any gaps resulting from working in different locations and not always qualifying for local solutions or vesting rights. Our expat solutions provide both risk cover and pension solutions, and help ensure that expats have decent risk and retirement benefits both during and after retirement, comparable to an employee with a similar career pattern, but always in the same country. In some cases, this can mean that in some countries an expat may receive more from the employer in terms of benefit contributions than a pure local employee, since social security and other state provisions must be considered differently.”

There is room in the system for expat workers to help themselves, however. “It is important that expats ensure they have a solution to cover any gaps resulting from working in different locations and not always qualifying for local solutions or vesting rights. As we work with modular solutions, we can ensure that every time an expat changes from one country to another, the modules – risk, health and savings – can be adjusted to the new environment,” she says.
All the same, the existence of, for example, “fringe benefit” taxes in certain jurisdictions, for example Australia, and the tax applied to benefits in countries such as the UK, mean efforts at complete equality are unlikely to succeed. “Given the different systems of social and labour law, as well as tax law and general living conditions, it is unrealistic to aim at absolutely equal treatment for employees across borders,” Schmid says. “What can be aimed at is comparable treatment taking into account the environment.”

“Legislation within the EU has ensured that there are no penalties if you move between countries, even if in the first country benefit contributions are tax efficient, that is, tax deductible, while in the second benefits are tax efficient. Tax optimisation is always a complex area. We provide transparency and information, but detailed tax planning has to be in the hands of the employer or the employees themselves.”

It is not always obvious from a Eurocentric viewpoint, but cultural differences – such as the expectation in South Asian countries and elsewhere that children will take care of their parents in old age – make a difference to the employee benefit solutions workers expect, something that Swiss Life Network has to tailor in. One problem, however, is that what parents expect today is not necessarily what children will want to be doing when they grow up, and pension provision and saving for old age, while far less important still in many cultures than they are in the West, are likely to move rapidly up the agenda in developing countries. “As we group best-in-class local solutions into one global solution, local customs are automatically considered in our plans,” Schmid says. “But we are certainly experiencing significant changes worldwide in relation to the expectation that children will take care of their parents and act as their pension solution. While the expectation is still there, ongoing globalisation and urbanisation, as well as the demographic revolution, are making it clear that this expectation cannot be met.

“Every individual needs a pension solution independent of their family and the next generation. In the West also, social security systems based on the so-called inter-generation contract [the expectation that today’s workers pay the taxes that cover the pensions of yesterday’s workers] are experiencing strong financial pressures.”

There does not seem to be a lot of evidence that, outside the obvious areas of differences in local health care provision and old age provision, employees around the world see benefits differently in different jurisdictions. “The importance of employee benefit solutions for employees depends on the level and extent of social security, the tax incentives available in relation to employee benefits, and last but not least, the economic environment and degree of development of the economy,” Schmid agrees. “People generally care most about daily needs and consumption, and only then look at protection against the financial consequences of death, disability and old age.”

Meeting demands
“In the current environment, however, we are seeing increased awareness of the issues and more interest in employee benefits and old age pensions. We listen very carefully to our customers across the globe, and constantly adjust our solutions to meet their needs. We also take an active part in discussions shaping the employee benefit industry.”
All the same, whether employees and employers prefer benefits in terms of rewards and incentives, for example extra holiday allowances for longer service, bonuses for good service, or they prefer basic “inalienable” benefits, such as pensions, medical cover, and so on, “depends on the country and its economic situation,” Schmid says. This is another challenge for global employers: discovering whether the people who work for them in a particular jurisdiction would like more cash or holidays, or whether they look for employee benefits covering death and disability, and a decent income after retirement. “From an employer standpoint, there is also the question of social responsibility,” Schmid says. “Firms need to make sure that employees are aware of the pension situation, and can participate in a second pillar pension scheme.”

Employers also need to look to the future, when the world comes out of the current recession, and skilled, committed workers start to get scarce again as employment picks up. “Employee benefit solutions are an important tool to attract and retain talented employees, and studies show that these can also have a direct positive impact on company performance,” Schmid says. For these reasons, “employers have a real interest in providing appropriate employee benefit solutions, and not just cash or longer holidays.”

For further information www.swisslife-network.com

When did your banker last recommend against an execution or transaction for which they are being remunerated?” This leading question awaits prospective clients browsing the website of Ondra Partners, one of a new breed of independent boutique offering “unbiased” advice to companies raising equity, debt or making acquisitions.
Senior bankers at established underwriting banks get angry at any implication they do not always work in a client’s interest and in turn question whether firms offering advisory services have the experience and knowledge to be of help to companies.

One senior banker at a London-based firm said: “These firms have very little to offer as they don’t have the day-to-day experience of the primary equity markets that you need to make the type of judgments they say they can offer. Frankly, they simply add another level of complexity and expense that is certainly not in the best interests of the client.”

In spite of complaints, there are signs companies in need of raising equity to strengthen their balance sheets and wary of getting it wrong, are frequently seeking independent advice.

Investment advisers Lazard and Rothschild have so far been the main beneficiaries of this, working on some of the largest European equity issues of the year, such as Italian utility Enel’s €8 billion deal as well as some of the more complex capital restructurings such as the £1bn equity offering by UK building supplier Wolseley.

These banks say there has also been a resurgence of demand from private equity sponsors wanting to float portfolio companies and from companies and investors considering ways to monetise their equity holdings.

Advisers must tread delicately so their involvement adds to the smooth running of their clients’ deals, rather than creating tensions with corporate brokers and equity capital markets bankers.

David Landman, a partner and chief operating officer for Europe at advisory boutique Perella Weinberg Partners, said: “An adviser should be an advocate for a company and its shareholders during an equity offering, not an adversary of the underwriting banks.”

One of the main jobs of independent advisers on the recent spate of rights issues has been to offer guidance on the structure of equity syndicates and the level of underwriting fees, in part because companies have been keen to make underwriters and bookrunners more accountable.

Underwriter input
Advisers have been asked to draw up underwriting contracts that restrict the banks’ ability to hedge their positions and to push for greater transparency about banks’ intentions to involve sub-underwriters. Some companies have wanted to take the opportunity to reward supportive shareholders via sub-underwriting fees and have also been keen to include creditors on equity syndicates.

Paul Gismondi, head of capital markets advisory in London at Lazard, said: “Equity offers are relationship building opportunities that don’t come about every week. Some companies have needed or wanted to include lending banks in an equity syndicate given that debt is a scarce commodity.”

The risks associated with higher equity market volatility and the weakened balance sheets of many investment banks have made fees a hot topic.

Advisers say there has been a lot of brinkmanship by banks attempting to drive up fees, while some have not been willing or able to commit to hard underwrite deals themselves.

Adam Young, joint global head of equity advisors at Rothschild, said: “The risk appetite of underwriters has varied considerably during the first half of this year and companies have wanted advice on the right line-up of banks to cover the naked risk in case a deal was not fully sub-underwritten.”

There has also been a trend for more unbundling of fees into a base fee plus incentive and discretionary elements and this has led to advisers being asked for their view on how the banks have performed when fees are allocated.

This quality control is important given that the banks with the greatest underwriting capacity might be over-stretched. One head of European equity underwriting said some of the strongest banks are having to leave relatively junior bankers in charge of smaller rights issues because their top bankers are in such demand.

Equity advisers also claim to have been playing a more strategic role at an earlier stage, advising on timing, alternative structures such as a rights issue versus equity placing and the right message about how the proceeds will be used on complex deals involving balance sheet restructuring.

They say preparation, particularly on deals that were not “plain vanilla” equity raisings, have helped get deals done faster with the best chance of success and less chance of leaks.

Gismondi said: “It is a market of windows so it is important that a company is not exposed to the market until it is absolutely certain that it wants to launch a deal. Independent advisers can begin the documentation process before brokers and other banks are brought on board.”

However, bankers at large underwriting firms say preparatory work done by advisers can sometimes be substandard and create more work for bookrunners.

One head of corporate finance based in London said: “We often find this when advisers have been given responsibility for preparing the equity story ahead of a deal. We’ll be brought in two weeks before launch and find ourselves with a plan that hasn’t been properly market tested and will have to spend a lot of time rewriting the proposal.”

The increased profile of independent boutiques clearly rankles with many equity bankers, who object to the implication that their views might be tainted by self interest, claiming many “independent” advisers are just investment bankers trying to make money from the recapitalisation process while there are no mergers and acquisition fees.

Nick Reid, co-head of UK investment banking at UBS, said: “Companies with strong and trusted relationships with their corporate brokers and investment banking advisers tend not to need support from anyone else.”
He said UBS’ corporate broking team offers a market view based on experience and relationships with shareholders, the advisory team comprises bankers who complement the broking relationship, undertake financial analysis and help brokers build the equity story, while the ECM team provides institutional relationships and execution expertise.

ECM bankers are also adamant their advice on equity offerings is the best because they are in the “flows” of the market day in, day out, speaking to institutional investors, gleaning information on trading activity and doing deals.
One head of ECM at a US bank said: “Equity advisory firms are only valuable as job creation schemes at a time of dislocation in the market. If you want culinary advice, you ask the chef who’s been tasting the food in the kitchen, not the person sitting in the dining room waiting for the meal to be served up.”

This question constitutes a Rorschach test for policymakers and economists. On one side are free market enthusiasts and neo-classical economists, who believe in a stark separation between state and business. In their view, the government’s role is to establish clear rules and regulations and then let businesses sink or swim on their own. Public officials should hold private interests at arm’s length and never cozy up to them. It is consumers, not producers, who are king.

This view reflects a venerable tradition that goes back to Adam Smith and continues a proud existence in today’s economics textbooks. It is also the dominant perspective of governance in the US, Britain, and other societies organised along Anglo-American lines – even though actual practice often deviates from idealised principles.

On the other side are what we may call corporatists or neo-mercantilists, who view an alliance between government and business as critical to good economic performance and social harmony. In this model, the economy needs a state that eagerly lends an ear to business, and, when necessary, greases the wheels of commerce by providing incentives, subsidies, and other discretionary benefits. Because investment and job creation ensure economic prosperity, the objective of government policy should be to make producers happy. Rigid rules and distant policymakers merely suffocate the animal spirits of the business class.

This view reflects an even older tradition that goes back to the mercantilist practices of the seventeenth century. Mercantilists believed in an active economic role for the state – to promote exports, discourage finished imports, and establish trade monopolies that would enrich business and the crown alike. This idea survives today in the practices of Asian export superpowers (most notably China).

Adam Smith and his followers decisively won the intellectual battle between these two models of capitalism. But the facts on the ground tell a more ambiguous story.

The growth champions of the past few decades – Japan in the 1950s and 1960s, South Korea from the 1960s to the 1980s, and China since the early 1980s – have all had activist governments collaborating closely with large business.

All aggressively promoted investment and exports while discouraging (or remaining agnostic about) imports. China’s pursuit of a high-saving, large-trade-surplus economy in recent years embodies mercantilist teachings.
Early mercantilism deserves a rethink too. It is doubtful that the great expansion of intercontinental trade in the sixteenth and seventeenth centuries would have been possible without the incentives that states provided, such as monopoly charters. As many economic historians argue, the trade networks and profits that mercantilism provided for Britain may have been critical in launching the country’s industrial revolution around the middle of the eighteenth century. None of this is to idealise mercantilist practices, whose harmful effects are easy to see. Governments can too easily end up in the pockets of business, resulting in cronyism and rent-seeking instead of economic growth.

Even when initially successful, government intervention in favour of business can outlive its usefulness and become ossified. The pursuit of trade surpluses inevitably triggers conflicts with trade partners, and the effectiveness of mercantilist policies depends in part on the absence of similar policies elsewhere.

Moreover, unilateral mercantilism is no guarantee of success. The Chinese-US trade relationship may have seemed like a marriage made in heaven – between practitioners of the mercantilist and liberal models, respectively – but in hindsight it is clear that it merely led to a blowup. As a result, China will have to make important changes to its economic strategy, a necessity for which it has yet to prepare itself.

Nonetheless, the mercantilist mindset provides policymakers with some important advantages: better feedback about the constraints and opportunities that private economic activity faces, and the ability to create a sense of national purpose around economic goals. There is much that liberals can learn from it.

Indeed, the inability to see the advantages of close state-business relations is the blind spot of modern economic liberalism. Just look at how the search for the causes of the financial crisis has played out in the US. Current conventional wisdom places the blame squarely on the close ties that developed between policymakers and the financial industry in recent decades. For textbook liberals, the state should have kept its distance, acting purely as Platonic guardians of consumer sovereignty.

But the problem is not that government listened too much to Wall Street; rather, the problem is that it didn’t listen enough to Main Street, where the real producers and innovators were. That is how untested economic theories about efficient markets and self-regulation could substitute for common sense, enabling financial interests to gain hegemony, while leaving everyone else, including governments, to pick up the pieces.

Dani Rodrik, Professor of Political Economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize. His latest book is One Economics, Many Recipes: Globalisation, Institutions, and Economic Growth

Emerging markets and exchange traded funds (ETFs) have one thing in common: both are destined to hold increasing importance for investors for many years to come. Emerging markets offer some of the strongest long-term return prospects as they take their place in the global economy of the 21st century. The BRIC countries are widely predicted to become some of the biggest economies, yet there are many other nations set for growth too, in Asia, Latin America, Eastern Europe and the Middle East.

The growing importance of ETFs stems from the fact that they offer investors one of the most efficient, cost-effective and convenient ways to access returns both from emerging markets and an increasingly wide range of other investment opportunities around the world.

So just what are ETFs? ETFs track indexes but, unlike “tracker” mutual funds, they are also shares that can be bought and sold on the stock market in the same way as any other shares. They provide access to a whole market through the purchase of just one share. Investors can purchase shares through existing stockbrokers.
There has been an exponential growth in the number of ETFs offered to investors in recent years. At first, ETFs gave investors access to mainstream indexes (the first mainstream ETF was launched in 1993 and tracked the S&P 500), but increasingly they are giving access to much more exotic markets and sectors in ever more innovative ways. Given the rapid development and popularity of emerging markets, it is hardly surprising that ETFs are being launched to cover these markets, too. ETFs offer investors many advantages in accessing emerging markets.

The first big advantage of ETFs is that they are a convenient and cost-efficient alternative to purchasing all of the underlying securities of a particular index. Structured as a single security, traded on an exchange just like a stock, ETFs empower investors to access entire indexes in one go. Clearly, investors may wish to go for stockpicking funds, but this can be a risky approach, as you might fail to pick the right fund manager. Much of the interest shown in ETFs has come from the realisation that the vast majority of returns in any given investment portfolio result from long-term asset allocation decisions rather than short-term market timing expertise. In fact, academic evidence indicates that the majority of fund managers underperform their benchmark indexes. This is especially true during periods of high market volatility, for which emerging markets are noted. ETFs simplify the asset allocation process by giving low-cost access to particular indexes. This makes them the perfect ‘beta’ investment for investors who implement a ‘core-satellite’ investment approach. ETFs can also be used to give effective exposure to particular emerging market countries or regions, with the ability to rotate this exposure as and when required.

At present, there is a big question mark over whether in the next few years it would be a good move to take a stockpicker approach to emerging markets. At a roundtable discussion held by Lyxor ETFs on emerging markets, Robin Griffiths, a fund manager at Cazenove Capital Management and a noted technical analyst, pointed out that because emerging markets are going through an ‘awesome’ secular trend then this lends them to ETFs: if the secular trend is stronger than the cyclical one then a passive stance is better, while if the reverse is true, then it is better to have an active stockpicking approach. Market conditions in favour of owning ETFs are likely to change only slowly over several years, he said.

Cost efficiency
Low cost is arguably the single most attractive feature of ETFs. BGI reports that the average total expense ratio for equity ETFs in Europe now stands at 37 basis points per annum – some way below the average TER of 87 basis points for equity index tracking funds and 175 basis points for active equity funds across the continent. This is an advantage for ETFs in any equity market, of course, but the high costs of trading in emerging markets can make ETFs a particularly cost-effective way to invest. If an investor decides to take the index tracking route, then the reliability of ETFs means that they are clearly advantageous because they have such low tracking errors against their benchmarks. Given liquidity problems tend to be more prevalent in emerging markets then a low tracking error gives ETFs a clear advantage over other types of funds, even tracker OEICs, SICAVs or unit trusts.

Such a wide choice of ETFs is now available that investors can have access to emerging countries. This has less relevance for retail investors but is a useful attribute for institutions, with large amounts to invest. Many global emerging market products with established track records rarely offer this single country access and if institutional investors like a particular country story then the chances are increasing that they can get that through ETFs.

Finally, ETFs are transparent and highly liquid. Investors can see the performance of an index and know how their investment is doing. Emerging markets are not noted for their transparency and liquidity, so these are reassuring qualities for investors. What is more, ETFs are listed on mainstream markets, such as the London Stock Exchange, with prices available in real-time, so investors can get in and out of the market any time of the day at a price very close to net asset value. This contrasts with mutual funds, which can only offer one price per day and because they tend not to be traded very often they can therefore have wide spreads.

Despite the growing popularity of emerging market ETFs, investors still tend to have underweight exposure to them generally. For example, when Lyxor launched its first emerging market ETFs into the UK in 2007, our analysis of data from the Investment Management Association covering the preceding five years showed that the total amount invested in UK retail and institutional funds in the global emerging markets sector had risen from just one percent to 1.6 percent, while exposure to the Far East ex Japan sector increased from just three percent to 3.6 percent.

Yet these results were in sharp contrast to research that we also carried out to assess sentiment towards emerging markets among UK independent intermediaries. In a survey of IFAs earlier that year, we found that nearly half (46 percent) of respondents recommended that investors should allocate between five and ten percent of their portfolios to emerging markets and 73 percent said that investors needed to increase their exposure to emerging markets. Anecdotally, we would say that a similar situation can be found among investors and advisers across Europe, where investors are clearly sold on the message of emerging markets, yet still have yet to align their portfolios accordingly.

The main reason cited among the IFAs we asked for this apparent mismatch was a lack of emerging market accessibility. ETFs, and Lyxor ETFs in particular, aim to help investors close this gap and help them improve the performances of their portfolios by providing cost effective solutions to some of the world’s fastest growing economies.

It would seem that improving investor sentiment is bound to lead to increasing allocations to emerging markets in their portfolios going forward. The increasing prevalence and choice of ETFs means that it will be hard for investors to ignore them. Hopefully, as investors and advisers increase their understanding of ETFs and grow to appreciate the benefits they offer, much of the increase in emerging market investment will find its way into ETFs. By using ETFs, investors can harness a whole new range of investment strategies both efficiently and cost-effectively.

The growing popularity of emerging markets and the use of ETFs to access them can be seen from Lyxor’s own ETF data. The number of shares outstanding in Lyxor’s leading emerging market ETFs collectively increased by 86 percent over the twelve months ending June 30, 2009, especially impressive considering the extreme levels of volatility in these markets over the same time period.

To paraphrase a quote from the film Casablanca, emerging markets and ETFs appear to be at the beginning of a beautiful friendship.