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Why Active Matters in Emerging Markets

Speaker

Director, Portfolio Specialists

on
November 22, 2024

In this brief video, we explain the shortcomings of passive investing in emerging markets and the benefits of active investments.

Transcript

Passive investing is a big reason why emerging markets have disappointed investors in recent years. At Sands Capital, we believe that the index has structural issues.

First, the MSCI Emerging Markets Index only captures a fraction of what we view as the true opportunity set.

the index is a poor reflection of the opportunity set

Estimated Total EM Equity Universe (# Companies)

Source: FactSet. For illustrative purposes only. Data as of 12/31/22. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging market (EM) countries. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

In our estimation, the opportunity set for active investors is nearly four times as large as what’s offered by the index. Secondly, despite being passive, the index has actually made some costly active decisions. For instance, in 2021, the MSCI Emerging Markets Index lifted its China exposure to all-time highs right before that market crashed amid the regulatory crackdown across industries.

Despite low overall returns, there were some great opportunities

MSCI EM Constituent Return Distribution 12/31/13 - 12/31/23

Source: FactSet. For illustrative purposes only. Data as of 12/31/23. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging market (EM) countries. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

Third, despite weak index-level returns over the past five years, there’s actually been significant return dispersion when looking at the index constituents underneath the surface, and this has provided an opportunity for those with a more discerning or selective approach.

active management has historically exploited these shortcomings

As of 6/30/24

The eVestment All Emerging Markets Equity universe consists of emerging markets equity products inclusive of all style, capitalization, and strategy approaches. The rankings shown may not be representative of any one client’s experience because the rankings reflect a sample of client experiences. These rankings are not indicative of the adviser’s future performance. Investment products are classified into eVestment universes by using a combination of performance and style analysis, portfolio characteristics, country and currency allocations, and a review of the strategy’s narratives. eVestment universes consist solely of investment products that provide sufficient data, and therefore may not reflect the complete opportunity set within a given investment style. eVestment data as of 12/31/23 and is subject to change. Data taken from eVestment on 1/22/24. For illustrative purposes only. The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging market (EM) countries. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

Active management has a track record of exploiting these index inefficiencies, and as of September 30, most active managers have outperformed over the trailing three-, five-, and 10-year periods.

For more information on our Emerging Markets Growth strategy, visit our page below.

Disclosures:

The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. All investments are subject to market risk, including the possible loss of principal. International investments can be riskier than US investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional and economic developments. Investments in emerging markets are subject to abrupt and severe price declines. The economic and political structures of developing nations, in most cases, do not compare favorably with the US or other developed countries in terms of wealth and stability, and their financial markets often lack liquidity. Because of this concentration in rapidly developing economies in a limited geographic area, the strategy involves a high degree of risk. In addition, the strategy is concentrated in a limited number of holdings. As a result, poor performance by a single large holding of the strategy would adversely affect its performance more than if the strategy were invested in a larger number of companies. The strategy’s growth investing style may become out of favor, which may result in periods of underperformance. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money.  A company’s fundamentals or earnings growth is no guarantee that its share price will increase. Characteristics, sector (and regional, country, and industry where applicable) exposure and holdings information are subject to change and should not be considered as recommendations.

The MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries. With 1,379 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The MSCI Emerging Markets Index was launched on Jan 01, 2001. Data prior to the launch date is back-tested test (i.e. calculations of how the index might have performed over that time period had the index existed). There are frequently material differences between back-tested performance and actual results. Past performance — whether actual or back-tested — is no indication or guarantee of future performance.

The MSCI All Country World Index ex USA is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed (excluding the US) and emerging markets.

“Active managers” defined as constituents of the eVestment All Emerging Markets Equity universe, which consists of emerging markets equity products inclusive of all style, capitalization, and strategy approaches. Source: eVestment, data as of 9/30/24 and accessed on 10/15/24.

The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio or that securities sold have not been repurchased. You should not assume that any investment is or will be profitable.
There is no guarantee that Sands Capital will meet its stated goals.

Forward earnings projections are not predictors of stock price or investment performance, and do not represent past performance. There is no guarantee that the forward earnings projections will accurately predict the actual earnings experience of any of the companies involved, and no guarantee that owning securities of companies with relatively high price to earnings ratios will cause the portfolio to outperform its benchmark or index. Any holdings outside of the portfolio that were mentioned are for illustrative purposes only.

GIPS Reports found here.

Notice for non-US Investors.

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