Schroders Quant: Like EM

But EM Moves Too Fast For Most Investors

July 1, 2014

Barron's - EM Daily Blog

Justin Abercrombie, head of the quantitative equity group at London-based asset manager Schroders, told Barron’s in a profile piece last weekend that he likes emerging markets. From its inception on July 31, 2008, to April 30 this year, the Schroders Global Value, which uses quantitative methods to screen stocks around the world, was up 10.64% annualized net of fees, while the MSCI AC World Index was up only 5.48%.

My colleague Michael Shari wrote:

SO WHERE ARE ABERCROMBIE, his analysts, and their computers finding opportunity? They like emerging markets, which he says move through economic cycles too fast for most investors to time them. By his calculation, emerging markets trade at a discount of about 35% to developed markets, having fallen from a recent premium of about 10%.

Investing in emerging markets can be frustrating. On the one hand, it is a volatile market. In terms of risk, the iShares MSCI Emerging Market ETF‘s (EEM) annualized standard deviation of return was 26% over the past five years, a lot higher than the S&P 500′s 18%, data fromMorningstar show. On the other hand, the investors were not properly compensated for the risks. The annualized returns was just slightly over 6%, whereas the S&P rewarded investors an annualized 16.3%.

But that is, in finance terms, unconditional returns. Emerging markets can give a handsome conditional returns, if you can time the market well.

Case in point, the iShares MSCI Brazil Capped ETF (EWZ) returned around 20% in two months, from its mid-March low. Or the iShares MSCI Indonesia ETF (EIDO) advanced roughly 30% in three months from its February low.

But these rallies are short. By the time U.S. investors read about them and understand the underlying drivers behind the equity gains, half of the froth is gone. This year, Brazil and Indonesia in part rallied after their current accounts improved, but more crucially, investors piled in to take advantage of potential rallies from major political change. The election bumps seem to have fizzled out. Brazil’s opposition parties were not making substantial gains on presidentDilma Rousseff and Indonesia’s election has turned into a close tie.

Tags: consulting, emerging markets, global markets, investment, schroders
Posted in Global, Consulting