In a previous blog post, we cast a spotlight on the challenges facing active equity managers in the U.S. Large Cap universe. Now we’ll look specifically at Global Emerging Markets (GEM) equity as new, positive trends are coming forth. According to eVestment data, GEM active managers have experienced $38B in outflows over the period from Q3 2015 to Q3 2016. In Q3 2016, the universe experienced inflows of $6.3B.
There has definitely been a significant shift in sentiment since Brexit (June 23, 2016) as the interest in the GEM universe as measured by screening activity on the eVestment database has doubled in the last quarter. The “sentiment towards emerging markets continues to become more positive as perception towards the asset class improves,” as reported in a recent article by Money Marketing.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Seeking Alpha through Active Management in Global Emerging Markets
Ignites Europe recently reported that managers investing in emerging markets are under pressure as “passive managers attract record flows and erode their [active] rivals’ market share.” Based on Q3 data in eVestment, this trend may be reversing. Our data shows that net flows into active have been steadily increasing and, in the last quarter, GEM active money managers outpaced their passive counterpart.
Characteristics of a winner in GEM
Funds that are the most concentrated and most similar to smart beta strategies are, at the moment, driving the flows in the GEM space. The more diversified products with active share in the range of 0.7-0.8 are suffering the most in terms of institutional flows.
Let’s dive a bit deeper into the elements that clearly affect a manager’s ability to win new GEM mandates:
Based on “rack-rate fees,” there is at least a 20 bps difference in fees when we compare the managers experiencing the biggest vs. smallest net flows. Managers with the higher fees have had net outflows of over $13 billion over the past year.
Managers with active share between .738 and 0.817 are seeing larger outflows than managers at either end of the spectrum. In the GEM, where the markets are not yet so efficient and managers are able to find alpha, investors favor managers that are actively looking for new investment ideas.
Number of Holdings
Since investors are now focusing on more concentrated portfolios, it may be more difficult to gain assets for strategies with a high number of holdings. Managers with higher number of stocks in their strategies have been losing more assets than the concentrated portfolios this past year.
Investors have begun to favor strategies investing more heavily into Africa, Middle East and China. Just compare the two columns in the table above summarizing the winner characteristics of a global emerging markets strategy. There are significant differences in the average geographic weights between the managers who are seeing larger and smaller flows. If your strategy’s investment policy allows, adding allocation to these geographic areas may be viewed in a positive light from investors. As we can see from the charts below, heavy weights in Eastern Europe or Latin America are not currently favored.
How to best position your GEM strategy going forward
We will continue to keep an eye on global emerging markets, but institutional investors seem to have pivoted toward this market. There appears to be continued focus on fees and portfolio concentration. Geographic distribution of the investments is also something to keep in mind as you position your products for the institutional market.