Managing style in an emerging markets equity fund
30 April 2019 | Markets and Economy
Growth has dominated in emerging markets in recent years, but with periodic swings to value. Vanguard’s emerging markets fund specifically manages style swings
A key attraction of emerging markets is their dynamism. They are emerging. They are changing, sometimes quickly, sometimes slowly. A major change over the past 10—15 years has been in the makeup of the universe. Where it was once as much as half materials and commodities, today the sector mix is broader and more various, with technology and financials among the most important.
This offers active managers a wider and more interesting opportunity set. It can also mean managers riding on a winning style, such as ‘growth’ or ‘value’. It might look like the outperformance is coming from stock selection, while in practice it is coming from the market more generally favouring a particular style tilt.
The chart shows that for much of the past three years growth has massively outperformed value. A manager whose approach was to invest in growth stocks, in companies that have higher earnings and cashflow than the market, is likely to have been rewarded above and beyond their skill at picking stocks. Conversely, managers whose investment philosophy consisted of investing in undervalued companies might have struggled, even where they were identifying excellent long-term opportunities.
Source: Morningstar, returns in sterling, gross income reinvested, net of costs and taxes
Given the market’s preference for growth, client cash-flows have moved to funds with a growth bias. This is not necessarily a bad strategy. But investors should be aware of where their returns are coming from and understand how the style tilt might impact their experience going forward.
There are two particular caveats to bear in mind. One is that growth tends to outperform during up markets, but to fall more heavily than value in down markets. The second is the broad cyclicality of the two styles. During the second half of 2018, as US interest rates rose, reducing valuations on the growth side of the market, and increasing the relative performance of value.
Timing these rotations is fiendishly difficult. Even where the timing is right, value as a style tends to outperform in relatively limited spurts, often only a handful of days in a year. The most sophisticated investors struggle to capture such fine, though important, movements.
The Vanguard Global Emerging Market Fund
Vanguard’s actively managed Global Emerging Market Fund is designed to manage carefully and closely balance between growth and value. It invests in three distinct yet complementary sub-advisors, all of whom have demonstrated the ability to add alpha above and beyond simply their style being in favour.
Our fund allocates 33% to Pzena, a boutique New York based deep-value manager, 33% to Baillie Gifford, a manager focused on growth and 33% with Oaktree, one of only a few investment houses who successfully adopt a “go anywhere” approach when it comes to EM investing. Oaktree specialise in risk control – the perfect complement to Pzena and Baillie Gifford’s investment philosophies.
The fund’s returns since inception demonstrate the results of its structure. Despite the rotations between growth and value seen in the broader market, the fund has delivered consistently strong performance. It has done this with less risk than its peers, as measured both by downside volatility and maximum drawdown.
All active funds experience periods of underperformance and despite its strong record so far, the Vanguard Global Emerging Market Fund is of course no different. It is intended as a long-term core investment for those with a preference for active management.
Reflecting this approach, rather than chopping and changing managers on the basis of short-to-medium term performance, Vanguard develops long-standing relationships with its sub-advisers. Managers are appointed through a long and challenging process, typically lasting over three years and managed by our 20-plus Oversight and Manager Search team. Final decisions made by the main board under the guidance of our chief executive Tim Buckley. Although constantly under review, once established, relationships with fund managers can last 20, 30 or even over 40 years.
In keeping with our commitment to low cost, the fund is available at a competitive ongoing charge of 0.80%. The less you pay for alpha, the more your clients keep.
Rolling 12-month performance
|01 Apr 2014 - 31 Mar 2015||01 Apr 2015 - 31 Mar 2016||01 Apr 2016 - 31 Mar 2017||01 Apr 2017 - 31 Mar 2018||01 Apr 2018 - 31 Mar 2019|
|Vangaurd Global Emerging Markets Fund||—||—||—||10.91%||4.89%|
|FTSE Emerging Index||16.03%||-9.10%||35.19%||8.47%||1.64%|
Source: Vanguard, GBP, NAV to NAV, net of costs and taxes, gross income reinvested
Past performance is not a reliable indicator of future results.
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Learn more about the Vanguard Global Emerging Markets Fund