Active Funds for Emerging Markets

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FInatic
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Active Funds for Emerging Markets

Post by FInatic »

I was wondering if it makes sense to hold EM stocks in an active fund?

The reason I ask is because unlike the US with its deep and efficient markets, EM stock markets have lower institutional participation. So perhaps the pros have an edge?
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LadyGeek
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Re: Active Funds for Emerging Markets

Post by LadyGeek »

Welcome! Based on your comment, are you a US resident? If not, what is your home country?

=====================
Are you asking for assistance with your portfolio?

If so, may I suggest you start a new thread in the Personal Investments forum and post your portfolio information in that thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

For non-US residents, I suggest you start a new thread in the Non-US Investing forum and post your portfolio information in that thread using the My portfolio: seeking advice format.

If you have any questions, ask them in the new thread.
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TimeIsYourFriend
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Re: Active Funds for Emerging Markets

Post by TimeIsYourFriend »

FInatic wrote: Tue Apr 02, 2024 7:25 am I was wondering if it makes sense to hold EM stocks in an active fund?

The reason I ask is because unlike the US with its deep and efficient markets, EM stock markets have lower institutional participation. So perhaps the pros have an edge?
According to the SPIVA report, 95% of actively managed emerging market funds underperform their benchmark over a 20-year period so if there's a different in efficiency, it doesn't appear to be able to be leveraged net of fees. And the extra step with active management is that you have to pick the active manager that will outperform. That is not as easy as picking the outperforming manager as this group often changes year-to-year.
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nisiprius
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Re: Active Funds for Emerging Markets

Post by nisiprius »

FInatic wrote: Tue Apr 02, 2024 7:25 am I was wondering if it makes sense to hold EM stocks in an active fund?

The reason I ask is because unlike the US with its deep and efficient markets, EM stock markets have lower institutional participation. So perhaps the pros have an edge?
TimeIsYourFriend has the answer. Here's slightly more detail.

This is a standard talking point against indexing. The salesperson acknowledges the obvious: the success of indexing with US stocks. They make a strategic retreat and come it from another angle by saying "but only in US stocks" (or "only in bull markets") etc.

It's possible that the pros do create some alpha, but if they do, they don't make a gift of it to you, they keep it all for themselves. The 2023 S&P SPIVA report shows the track record after "expenses" (much of which is what the managers take).

Over the last ten years, 89% of actively managed emerging markets fund underperformed a benchmark index.

89%!

Even worse for twenty years.

2023 S&P SPIVA Report

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Topic Author
FInatic
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Re: Active Funds for Emerging Markets

Post by FInatic »

LadyGeek wrote: Tue Apr 02, 2024 7:31 am Welcome! Based on your comment, are you a US resident? If not, what is your home country?

=====================
Are you asking for assistance with your portfolio?

If so, may I suggest you start a new thread in the Personal Investments forum and post your portfolio information in that thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

For non-US residents, I suggest you start a new thread in the Non-US Investing forum and post your portfolio information in that thread using the My portfolio: seeking advice format.

If you have any questions, ask them in the new thread.
Home country is Singapore, but I think of myself as a global citizen. Have not decided where in the world I'll eventually retire(its still very far off)
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FInatic
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Re: Active Funds for Emerging Markets

Post by FInatic »

Thanks for the answers TimeIsYourFriend and nisiprius.

Currently at global market weight, wanted to confirm that my conviction is right in staying 100% passively indexed.
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Re: Active Funds for Emerging Markets

Post by hnd »

pointing at the 5-10% that outperform, emerging market funds that are considered "large cap" most often earmark like 5-15% of their portfolio to US stocks.

I had a friend want to delve into that world. I broke up my international investing with DFA developed and DFA emerging in my 401k. he sent me 2 funds that were popular looking emerging market funds based on how big they were. he was like these seem to do well. well one was basically FAANG + emerging market companies and the other was like half FAANG + emerging markets. like top 10 holding type allocations and I'm like well that hardly seems fair.
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Re: Active Funds for Emerging Markets

Post by Logan Roy »

I would say active makes less sense for EM, because EM covers over half the planet, and no active manager can have an information edge that covers that kind of territory. Where active has made sense for me in the past is where a manager has a high degree of specialisation in a sector and region, and can meet those they're investing in – e.g. regional micro-caps, local infrastructure, tech VC, etc.

One thing active EM can do – which is why inflows into active EM are relatively high this year – is choose not to invest in China. While that doesn't guarantee outperformance (China is ostensibly very 'cheap'), I believe a lot of investors simply don't want their capital exposed to those specific risks. Which is quite reasonable.
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FInatic
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Re: Active Funds for Emerging Markets

Post by FInatic »

Logan Roy wrote: Tue Apr 02, 2024 10:58 am I would say active makes less sense for EM, because EM covers over half the planet, and no active manager can have an information edge that covers that kind of territory. Where active has made sense for me in the past is where a manager has a high degree of specialisation in a sector and region, and can meet those they're investing in – e.g. regional micro-caps, local infrastructure, tech VC, etc.

One thing active EM can do – which is why inflows into active EM are relatively high this year – is choose not to invest in China. While that doesn't guarantee outperformance (China is ostensibly very 'cheap'), I believe a lot of investors simply don't want their capital exposed to those specific risks. Which is quite reasonable.
I suppose that would make sense if you trust the manager to choose which EM market will outperform. If it's just to avoid China, it might be easier to buy into an EM ex-China passive fund, e.g EMXC.
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