Investing in Emerging Market (EM) equities has historically been a popular choice for investors due to their potential for high returns and diversifying benefits. However, in recent years, EM equities have struggled to deliver the same level of performance as developed market equities. This shift in performance has led to a more complex and challenging landscape for EM investing.
Despite the disappointing overall performance of EM equities, not all strategies have underperformed. In particular, multi-factor EM equity approaches have shown promising results, outperforming standard EM equity strategies and active EM exchange-traded funds (ETFs).
To navigate this evolving landscape, managers need to adopt sophisticated approaches to decipher and manage EM portfolios successfully. This includes expanding knowledge of newer entrants to the investable EM basket and development of the requisite skills to navigate the new EM landscape, which presents a daunting challenge.
A multi-factor investment process has proven to be an effective strategy for achieving robust performance in EM equities. This strategy is based on the utilization of six equity factors that have been validated by extensive research and have provided reliable and systematic premia across various geographies and market environments. These factors include Value, Momentum, Size, Low Volatility, Profitability, and Low Investment.
The investment process involves building portfolios for each individual factor, refining stocks based on their factor intensity, generating portfolio weights, and ultimately weighting each individual factor portfolio equally to build a final multi-factor EM strategy. This approach emphasizes diversification, risk control, and harvesting factor premia over stock picking.
Overall, a quantitative, multi-factor strategy offers an antidote to the challenges of EM equity investing, delivering strong performance compared to broad emerging markets and other active managers in the space. This approach provides hope for investors seeking a robust emerging market equity strategy to complement their other equity investments. If you found this information useful, remember to subscribe to the Enterprising Investor for more valuable insights.
