Global portfolio managers need to shift their investments into emerging markets and away from "excess" developed-country assets to help balance the global economy, giant bond-fund manager Pacific Investment Management Co., or Pimco, said Tuesday.

A shift in capital flows toward emerging markets is crucial to global economic rebalancing, since finance "played a key role in creating imbalances" originally, said Ramin Toloui, Pimco's co-head of the global emerging markets portfolio management team, in a report.

"Heavily indebted industrial countries must consume less while high-potential, low-debt emerging market countries must consume more," he said.

Portfolio allocations reflect a similar imbalance. Emerging markets represent about 4% of the equity portfolios of U.S. investors, even though these economies represent about 36% of global output and 68% of global gross domestic product growth, Toloui said, adding that representation in bond portfolios is even less.

That leaves room for a potential massive reallocation of portfolios, he said.

"A redirection of financial flows to emerging markets has another key influence on global rebalancing, but potentially generating appreciation of emerging market currencies versus those of industrial countries," Toloui said.

Stronger emerging-market currencies would help those economies reduce their dependence on exports and encourage consumers to buy more imported goods from the developed world, he said. In addition, more investment capital reaching emerging markets would reduce capital costs, helping to improve investment, hiring and labor income--all of which would strengthen the consumer base, he said.

Shifting allocations toward emerging economies has been visible already with Asian central banks, who have diversified away from U.S. and German government bonds to invest in bonds of their emerging-market neighbors, for example. Meanwhile, increased adoption of GDP-weighting for bond indexes--which weighs a country according to its national income, not its national debt as many indexes do currently--will also likely contribute to portfolio rebalancing, Toloui said.

"A multi-year reallocation by global investors away from excess developed country assets into emerging markets facilitates both global economic and portfolio rebalancing," he said, adding that this shift is "poised to be a global phenomenon."

However, changing the current dynamic of portfolio flows--where higher-debt, slower-growth developed economies see the bulk of allocations--will take some time, Toloui warned. Many emerging-market countries are used to export-led growth, with some policy makers even taking some steps to curb large capital inflows that could strengthen their currencies significantly, he said. Policy makers also have to deal with the challenge of improving domestic markets' capacity to absorb more foreign capital flows, he added.

-By Erin McCarthy, Dow Jones Newswires; 212-416-2712; erin.mccarthy@dowjones.com @djfxtrader