Besides using active managers, is there now a case for using newer, perhaps more innovative, emerging market strategies?
Peter Sleep, senior investment manager at 7IM, reveals his portfolios use a combination of futures, Tobam’s Anti-Benchmark Emerging Markets Equity Strategy, as well as 7IM’s own EM Value Fund.
While the two funds would both fall under the smart beta category, 7IM’s has a bias towards value stocks, while the Tobam vehicle sets out to have no bias by design.
“The MSCI EM index has quite a skew to financials and also to resource stocks – particularly the big Brazilian and Russian players – and investors have been pushed around by what’s going on in those sectors and are not fully diversified,” Sleep explains.
“Yes, you will get the return of the equity markets eventually, but with unrewarded volatility and the rise you have will be much more unpleasant because of the dominance of the big companies.
“What Tobam’s fund does is to look past market cap and other risk factors which could potentially drive a market and try to equally weight those so you don’t have these skews and obtain maximum diversification. This reduces your volatility and tends to give you better performance as you gain access to smaller companies.
“For example, when you think of emerging markets you don’t think of healthcare companies, but they are there and growing fast, and you don’t capture that in a market-cap weighted index.”
From smart beta, to absolute return and thematic or country-specific vehicles, investors have plenty of choice in how they access emerging markets directly. But again, it’s worth stressing, that just because they are cheap, it doesn’t mean they can’t get even cheaper.
