Is active or passive best for emerging markets?

Something we often hear is that, if you invest in emerging markets, then the best way to do it is via an actively managed fund. The theory goes that, because these markets are less well researched, say, than the US or the UK, it should be easier for an active manager to outperform. But that’s not borne out by the evidence. A video on the Bloomsbury Wealth YouTube Channel.

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Transcript: Robin Powell & Sherifa Issifu/ S&P Dow Jones Indices

RP: Something we often hear is that, if you invest in emerging markets, then the best way to do it is via an actively managed fund. The theory goes that, because these markets are less well researched, say, than the US or the UK, it should be easier for an active manager to outperform. But that’s not borne out by the evidence.

SI: Indexing works across market segments. The notion often is that you require an active stock picker or a different approach to emerging markets. But what our data shows is that: our SPIVA reports (which is S&P Index vs. Active) show that unequivocally indexing has worked for emerging markets. So over the last 20 years, 92% of active equity managers have underperformed our broad market index, which is the S&P/IFCI Composite.

RP: Active managers have long struggled in developed markets. But now, active fund performance is just as bad, and in some cases worse, in emerging markets. So how can that be explained?

SI: What we’ve seen in developed markets is the increasing professionalisation of market participants. There are more CFA charter holders, there are more Bloomberg terminals than ever before – making it much more difficult to outperform or gain this alpha because there are so many more market participants, the data is available so cheaply as well with so many analysts monitoring each stock. Whereas the alpha is so hard to find. We’re not saying it’s not available, but it’s hard to find an active manager who can help you outperform and help you outperform consistently.

RP: One drawback with emerging markets is that they tend to be more volatile than developed markets. But, as long as you’re broadly diversified across different countries, you shouldn’t let that put you off.

SI: We have to remember that the US was once emerging, and that we have all these acronyms. Things come and go, cycles move on. We even had the acronym of the BRICS, and it’s interesting that if you aren’t globally diversified, you may miss this opportunity while it grows. So a broad market allocation can help you catch that next market darling.

RP: In short, for most investors, having exposure to emerging markets does make sense. But indexing is the best approach — and don’t forget to diversify.

Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.

 

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