Is active or passive best for emerging markets?

TL;DR

Indexing is the most effective approach for investing in emerging markets, as active fund managers have consistently underperformed in these markets.

Transcript

foreign something we often hear is that if you invest in Emerging Markets then the best way to do it is via an actively managed fund the theory goes that because those markets are less well researched say than the us or the UK it should be easier for an active manager to outperform but that's not borne out by the evidence indexing Works across mark... Read More

Key Insights

• 🚨 Active fund managers consistently underperform in emerging markets, just as they do in developed markets.
• ☢️ The increasing professionalization of market participants and the availability of data make it challenging for active managers to find alpha.
• 🆘 While emerging markets may be more volatile, diversification can help investors mitigate risks and capture growth opportunities.
• 👍 Indexing has proven to be the most effective approach for investing in emerging markets.
• 🆘 Broad allocation and global diversification can help investors seize opportunities in emerging markets.
• 🚨 The history of the U.S. as an emerging market highlights the potential for growth and the importance of being globally diversified.
• 🚨 Investors should not overlook emerging markets' potential for growth and should at least have some exposure to these markets.

Questions & Answers

Q: Why is active fund management often recommended for investing in emerging markets?

Active fund management is often recommended due to the belief that the lesser-researched nature of emerging markets offer opportunities for active managers to outperform. However, this belief is not supported by data.

Q: How does indexing perform in emerging markets compared to actively managed funds?

The data shows that indexing consistently outperforms active fund management in emerging markets. Over the past 20 years, 92% of active equity managers have underperformed the S&P IFC Composite index.

Q: What factors make it difficult for active managers to outperform in emerging markets?

The professionalization of market participants and increased availability of data make it challenging for active managers to find alpha or consistently outperform. The presence of numerous analysts and low-cost data access reduces the opportunities for active outperformance.

Q: Is diversification important when investing in emerging markets?

Yes, diversification is crucial when investing in emerging markets. While these markets can be more volatile, spreading investments across different countries helps mitigate risks and allows investors to capture potential growth opportunities.

Summary & Key Takeaways

• Research suggests that actively managed funds do not outperform index funds in emerging markets.

• Active fund performance is even worse in emerging markets compared to developed markets.

• While emerging markets may be more volatile, diversification and indexing can mitigate risks and capture potential growth opportunities.