Emerging Markets Investing: The Case for Passive Funds

The case for passive investing seems the strongest in developed markets, where information is widely accessible and securities are accurately priced

Monika Dutt 17 January, 2017 | 1:17PM

In 2016, investors dipped their toe back into emerging-markets equity funds. The optimism in investor sentiment was sparked by a more positive global outlook on the Chinese economy and a stabilisation in commodity prices and emerging-markets currencies.

Over the past decade, emerging-markets funds have moved from being a mere satellite holding in many investors’ portfolios to a core allocation. Interestingly, and perhaps counterintuitively, investors are increasingly adopting a passive approach toward emerging-markets funds. Worldwide, assets in passively-managed emerging-markets equity funds have grown more than six times over the period, whereas assets have only doubled for their actively-managed peers.

Market Accessibility and Efficiency

At first glance, the case for passive investing seems the strongest in developed markets, where information is widely accessible and securities are accurately priced. In the US, this is supported by the fact that over its history, the high-profile S&P 500 index has proved a tough hurdle for many US large-cap managers to clear. Meanwhile, in emerging markets, which are oft-cited as among the least efficient, it may be easier to obtain an informational edge or identify mispriced securities.

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About Author

Monika Dutt  is a Passive Strategies Research Analyst for Morningstar Europe

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