Quantitative Investing in Emerging Markets

Abstract

Emerging markets (EM) equity is increasingly becoming a mainstream asset class among both institutional and retail investors. Following the global financial crisis of 2008, emerging markets have seen substantial asset flows, largely motivated by investors seeking economic growth while avoiding the perceived credit risk of the developed markets. In this report, we review and discuss current debates surrounding active management in EM. Does active management make sense in this asset class? Comparing quantitative and fundamental active managers, are there any observable systematic differences in performance? And lastly, where and how do quantitative managers add value in active EM equity management?We observe that quantitative investing has demonstrated similar performance to fundamental investing in EM over the last five and ten years. We suggest that quantitative approaches fare best in EM when driven by bottom-up stock selection, as opposed to top-down country selection. Lastly, we discuss how quantitative investment techniques can add value both in alpha generation and risk management in the emerging asset class.In summary, we conclude that quantitative investing in EM has the potential to generate sustainable active returns in the long run, through disciplined approaches to alpha generation and alpha capture.