The Case for Enhanced in Emerging Markets Equities

Forecasts for 2023 and beyond indicate that market uncertainty and volatility will likely persist for some time. The good news is that within emerging markets equities, volatility can create incremental alpha opportunities with only a minimal increase to the risk budget. Against this backdrop, we believe it makes sense to revisit the relative merits of enhanced strategies in emerging markets equities as an alternative to a pure passive allocation.

The last decade has been a challenging period for active investors. Prior to 2022, global markets had been a rising tide that lifted all ships — in these types of beta rallies, dispersion among individual stocks decreases and the potential for excess returns falls. The world is changing, however, and the aforementioned spike in volatility is likely to create more alpha opportunities. This is particularly true in emerging markets where information asymmetries, behavioral biases, and higher transaction costs create market inefficiencies that skilled managers are better able to exploit.

Emerging market equities, as measured by the MSCI Emerging Markets Index, have lagged MSCI World Index returns by over 35% since 2018.¹ Amid expectations for continued US dollar weakness, refocused fiscal policy to combat a global slowdown, the reopening of China, and institutional investor positioning, the asset class appears poised to be to the fore of a global recovery. Looking forward, 2023 presents what we believe to be an exciting opportunity for investors to move beyond passive solutions. Our Emerging Markets Enhanced strategy seeks to provide modest excess returns over time, while closely tracking the characteristics of the MSCI EM Index.

¹ Source: MSCI. Period from 01/01/2018 to 12/31/2022