Unlocking Alpha In Emerging Markets: Why Active Management Matters
EXECUTIVE SUMMARY
Global equity investors face a pivotal question about where — not just how — to allocate capital. Emerging markets are uniquely positioned as a powerful tool for diversification and performance enhancement. With recent analysis signaling that the long underperformance of emerging markets may be nearing its end, the debate between active and passive strategies in these regions takes on renewed relevance. While passive strategies have dominated performance in many developed markets over the last 20 years, inefficiencies inherent to emerging markets create fertile ground where active management can add decisive value.
- Higher Return Dispersion: Emerging markets exhibit greater stock return variability compared to developed markets. This wider dispersion creates opportunities for active managers, particularly those with robust stock selection skills and a quantitative edge. Data repeatedly highlights how effective stock selection drives superior results in these less efficient, more dynamic environments.
- Elevated Transaction Costs: Passive strategies face higher transaction costs in emerging markets due to frequent index-driven trades. Active managers, on the other hand, execute more strategic trades that aim to balance costs while capitalizing on alpha opportunities.
- Mitigating Sector Concentration Risks: Emerging market indexes suffer from significant sector imbalances, heavily tilted toward a few areas like Information Technology and Financials. This creates vulnerabilities to sector-specific shocks. By contrast, active managers can design portfolios with targeted diversification, mitigating concentration risks while preserving upside potential.
