Author Topic: Active management for Emerging Markets  (Read 1844 times)

FrugalFisherman10

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Active management for Emerging Markets
« on: March 29, 2017, 08:13:26 AM »
My friends dad just sent me this article, which is very interesting. It talks about how Blackrock is basically making a big bet on 'passive investing' as a reaction to all the trends of people moving money out of active management and into passive index funds.
It also has some great stats that I plan to use to warn my friends about the woes of high-cost, actively managed mutual funds,  like this:
 "According to data from Morningstar, only 11 percent of BlackRock’s actively managed equity funds have beaten their benchmarks since 2009."
Boom!

Nonetheless, when reading the article it made me think of something off topic. (by its mention of "United States stocks", here:  Still, there is no mistaking the larger message: Expensive, actively managed funds looking to make a mark picking United States stocks must adapt to the new realities at BlackRock.)

I'm sure I'll be crucified for this on this forum, but humor me. Could a compelling case be made for the merits of ACTIVE management in emerging economies? Arent emerging markets more of an environment for picking winners and losers, arbitrage, ability,  insights,  conviction, etc.? Given the amount of disruption,  information assymetry, complex legal environments / government politics, etc. I could be convinced that there is and will continue to be legitimate 'room' for active management to beat out indexes in international emerging markets. Now that the US and developed economies are entrenched in what I think is pretty darn close to an actual 'efficient market'  (defined loosely here as "near real time data being reflected in prices immediately"), will there be a Warren Buffet or Peter Lynch of emerging economies over the next say 50 years?

FrugalFisherman10

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Re: Active management for Emerging Markets
« Reply #1 on: March 29, 2017, 08:40:12 AM »
This is a compelling argument:  Essentially, emerging markets are more inefficient, so there should be more opportunities for above average returns due to skilled investment decisions.
Exactly - (and stated much more succinctly)

Ah yes, the part where you have to pick a/the good active manager still runs the idea into the ground haha.

Thanks

RangerOne

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Re: Active management for Emerging Markets
« Reply #2 on: March 29, 2017, 06:47:08 PM »
But also look at it this way.

Would it be fare to say that the world of emerging markets is more complex and volatile than the world of large cap companies?

If that is true, then why would we have any reason to believe a financial manager would have any more ability to pick winners and losers from a much larger set of more diverse and volatile companies when they can't pick winners and loser out of a stable set of large lumbering companies?

If anything I would expect similar or more erratic results just because there is so much more going on and less history to work with.

LAGuy

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Re: Active management for Emerging Markets
« Reply #3 on: March 29, 2017, 07:38:55 PM »
One of the top reasons active managers don't beat the benchmark is their need to charge a fee. Even if they're a great stock picker and they can do it consistently, can they do so and ALSO beat their fee. That's the main reason why indexing works. Bogle himself has said there's a place for active mangers...if they can get their fee low enough. In emerging markets, active management is often MORE expensive then domestic, so good luck to them beating their benchmark.

MustacheAndaHalf

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Re: Active management for Emerging Markets
« Reply #4 on: March 30, 2017, 03:30:25 AM »
See last table on line 10 of this SPIVA scorecard report from 2015:
http://us.spindices.com/documents/spiva/spiva-us-midyear-2015.pdf

Or to summarize, 92% of emerging market equity funds were outperformed their benchmark (S&P/IFCI Composite) in the 10 years studied in this report.  Shorter time frames of 1-5 years showed 70-75% of emerging market equity funds falling behind their benchmark.  The odds are better with an index fund, according to this report.

Also, SPIVA's methodology is impressive.  They consider survivorship bias, where if you look at today's funds for the past 10 year performance you'll accidentally leave out all the funds that closed in the past 10 years.  And most funds that close did poorly, so it biases performance upwards.  There's other biases also controlled by SPIVA's measurement techniques.

You can also look at which emerging market funds performed best over 3 years, 5 years and 10 years... and you'll notice the names don't match.  The fund that did best over one time frame isn't the best emerging market fund over other time frames.  So that's another indication that performance isn't so predictable or consistent.  So for me, I prefer a low-cost index fund even when dealing with the inefficiencies of emerging markets.