Emerging market equities have had a torrid time of late but, as Lynn Strongin Dodds finds, an active approach to the asset class can tap into returns.
“We believe an unconstrained active approach [to emerging markets] gives managers the flexibility to avoid companies that do not meet their corporate governance standards.”
Gareth Anderson
Emerging markets have had a turbulent time over the past few years and investors have retreated en masse over fears of a US interest rate hike, China’s slowing economy, lower oil prices and geopolitical risks. Given the instability, some believe the time is ripe for a more dynamic style while others maintain that active management has been the only way ever to unearth opportunities.
As Gareth Anderson, equity manager researcher at consultancy Mercer, puts it: “We believe an unconstrained active approach is the best way to gain exposure to emerging markets. One reason is that a number of the large index constituents can be characterised as opaque state-owned companies, and an active approach gives managers the flexibility to avoid companies that do not meet their corporate governance standards.”
Claire Peck, client portfolio manager, EM equities at JP Morgan Asset Management is also a proponent, noting the indices are dominated by state-owned large cap companies in the commodity sectors with consumer staples underrepresented in the index.
“For example, energy and materials are 8.7% and 7.2% respectively of the MSCI Emerging Market index while consumers are just shy of 15%,” she says. “However, the consumer staples and discretionary sectors have a much larger weighting in the S&P 500 (22%) and this should be the case with the emerging market benchmark.”
The bigger companies were also harder hit by the significant exchange traded funds (ETF) outflows over the past two years. The retreat started in 2013 when the US Federal Reserve hinted at tapering interest rates and the rout continued throughout 2014 when the MSCI Emerging Market index posted a 2.9% drop compared to its larger MSCI World counterpart which boasted a 5.5% return.
On the surface, year to date figures look promising with emerging markets turning in a slightly better performance at around 5.8% than the roughly 5.4% of the developed benchmark. However, the gains were mostly achieved in the first quarter with the month of May seeing a slide of almost 4%.
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