Is There Alpha in Institutional Emerging-Market Equity Funds?

Abstract

Can active fund managers outperform the passive index in the global emerging-markets equity arena? To answer this question, the author delineates emerging-market fund strategies and applies multifactor approaches to a unique data set, consisting of institutional emerging-market managers’ returns from Russell Investments. This analysis produced five major findings from January 1997 to June 2011: 1) product varieties have proliferated in this asset class; 2) active management can work in this asset class, but investors have relied more on research to hire good managers; 3) value managers tend to have higher alphas historically, but the supply of value managers is smaller than that of growth-or market-oriented managers; 4) price momentum, valuation, Asia, and the resources sector are key risk drivers; and 5) active risks from this asset class are still present, so it’s important to diversify across multiple strategies and styles to mitigate unwanted risks. Alphas are obtainable, but they are not free. <b>TOPICS:</b>Equity portfolio management, in markets, exchanges/markets/clearinghouses