Practical Applications of Emerging Market Investing: A Multi-Asset, Granular, and Dynamic Portfolio Approach

Abstract

In <b><i>Emerging Market Investing: A Multi-Asset, Granular, and Dynamic Portfolio Approach</i></b>, from the September 2022 special issue on emerging markets of <b><i>The Journal of Portfolio Management</i></b>, authors <b>Josh Davis</b> (of <b>PIMCO</b>), <b>Grace Qiu </b>(of <b>GIC Private Limited</b>), <b>German Ramirez</b>, <b>Helen Guo</b> (both of <b>PIMCO</b>), <b>Ding Li</b>, and <b>Zhihui Yap</b> (both of <b>GIC</b>) challenge the popular perception that emerging market (EM) securities are not worth including in a strategic asset allocation. The authors propose an EM investment strategy that consists of two portfolio building blocks. The first diversifies the portfolio by equalizing the risk coming from regions and asset classes, while the second tilts investment toward assets giving strong market signals. The authors backtest this strategy and demonstrate that from 2007 to 2020, it would have produced significantly higher risk-adjusted returns than index investing. Skepticism of EMs comes from the perception that they are high risk and perform poorly. The authors counter that the indexes used to track EM performance are poorly constructed and not well diversified, concentrate risk in a few countries, and select securities based on market capitalization (which is not optimal in EMs). This makes the indexes unreflective of EMs’ true potential.