eBusiness Weekly
Moneyweb
It has largely become received wisdom that it is easier for active managers to outperform in emerging markets. The argument is that emerging markets are more inefficient than developed markets, and therefore the opportunity to actively exploit those inefficiencies is greater.
This argument is, however, rarely scrutinised. It is largely presented as self-evident.
Analysis by Citywire however suggests that investors should perhaps be approaching this argument with more discretion than it generally receives.
Differentiation
The Citywire research specifically compares the performance of equity managers with broad emerging market mandates, with those investing in only one of the seven largest constituents of the MSCI Emerging Markets Index (excluding Russia). The results are revealing.
Citywire’s analysts looked at which of these funds showed a risk-adjusted performance ahead of their relevant benchmarks. The statistics below show the percentage of managers with a positive sector result and which, therefore, have outperformed their benchmark.
The first obvious takeaway is that more than two thirds of global emerging market managers have underperformed the index. This does not support the idea that this is a space in which active managers have a clear advantage.
However, the picture is rather different when looking at specific countries.
In Brazil, more than three quarters of managers outperformed over this period. A majority of managers also beat the index in Taiwan and China
The performance of managers in South Africa, however, is the weakest among the analysed countries.
Idiosyncrasies
This suggests two things.
The first is that the opportunity for outperformance in emerging markets is far from uniform. These countries have idiosyncrasies that affect how likely it is that active management will be able to extract value.
In South Africa, the concentration of returns in a few large counters and the relative illiquidity in the majority of mid- and small-cap stocks has made outperformance increasingly difficult. The relatively high involvement of institutional investors in the JSE also leads to higher levels of efficiency than for many of its peers.
Figures from the OECD show that the level of institutional stock market ownership in Brazil is much lower that it is locally. In China, it even lower still. This leads to very different kinds of opportunities in these markets.
Home ground advantage
The second consideration is that global emerging market funds appear to be at a disadvantage to funds focused on particular countries. This suggests that the ability to exploit opportunities in emerging markets may also be dependent on local expertise.
As Gandy Gandidzanwa, MD of Conceptual Fund Managers, told Citywire:
“Emerging markets like Brazil, China, India or the greater Pacific Rim still have proportionality lower levels of institutional domestic investors. The bulk of the markets would be either taken up by retail investors, or by foreign investors who do not have as much detail and information about what is happening domestically.
“So we believe that there are opportunities for active, on-the-ground asset managers to benefit from an information advantage.”
Patrick Cairns is South Africa editor at Citywire, which provides insight and information for professional investors globally.
