The Advantage of an Active Approach in Emerging Markets

Investors can choose active and passive strategies when investing in emerging markets (EM). Those who subscribe to the efficient markets theory—the belief that all available information has been accurately priced into securities in a given market—may choose a passive approach. We believe emerging markets are inefficient, thereby creating opportunities for active managers to add value through security selection and portfolio construction. 

Emerging Markets Are Less Transparent

While access to information on EM companies is improving, emerging markets remain less efficient than developed markets. Information isn’t priced in as quickly and dependable EM data can be harder to acquire. Compared to developed markets, fewer financial analysts cover the average EM company and many EM companies have no analyst coverage at all. This discrepancy is particularly pronounced among smaller companies.

Numerous EM companies are also less transparent. Lower levels of financial disclosure, less access to management, and language and cultural barriers often result in less transparency in corporate governance and reporting. This results in greater dispersion among analysts’ earnings forecasts, a higher likelihood of earnings revisions, and more earnings surprises, both positive and negative. These factors place a premium on fundamental analysis and security selection and contribute to a greater dispersion of returns generated by EM portfolios. Figure 1 shows the differences in wealth that active managers generate compared to a passive EM ETF. The top-third of active managers generated wealth in excess of the ETF while the bottom-third lagged.

Figure 1 | Skilled Active Managers Have Historically Added Value in EM

Data from 4/30/2003 – 2/29/2020. Source: FactSet.

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The Advantage of an Active Approach in Emerging Markets

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.