The MSCI Emerging Markets Index has risen 24.4% in YTD 2017. In the same period, the MSCI Frontier Markets Index has gained 20.6% and developed markets indices like MSCI World and MSCI EAFE have risen 13.8% and 16.6% respectively.
In the previous two articles of this series, we have analyzed the trends in investment flows to emerging markets as well as the major contributors to the performance of the iShares Core MSCI Emerging Markets ETF (IEMG) which attracted the most net inflows in YTD 2017.
This analysis leads to the question of whether there’s any merit to the argument of entering the emerging markets equities asset class now for reasons beyond portfolio diversification.
The interest of family offices
‘The Global Family Office Report 2017’, presented by UBS and Campden Research in September 2017 had some interesting insights on portfolios of family offices, a snapshot of which is present in the graph below.
According to the report, stocks and private equity were the driving factors behind the 7% returns generated by family offices in 2016 compared to 0.3% returns in 2015.
Though developed market equities were the driving forces behind the much-improved performance last year, these entities are getting increasingly interested in developing markets stocks due to their superior performance in recent times.
Reuters reported Sara Ferrari, head of the Global Family Office Group at UBS, saying that family offices say they “will continue to be invested in equities and a lot say they are looking at switching to developing markets equities from developed markets in search for yield, which is not very easy to find.”
It was also reported that 44% of the family offices surveyed intended to increase investments into developing market stocks.
Is there still time to invest?
For diversification purposes, increasing allocation to the broad emerging markets universe is still very much on the table. However, generating a higher alpha on investments in emerging markets equities requires cherry picking at the geographic and stock level, requiring more focus on bottom-up research.
There are markets like India and Mexico which are relatively expensive compared to their peers, but can still deliver great value with individual equities. On the other end of the spectrum are markets like South Korea, Taiwan, and even Poland, which are still attractive even after a good run up in 2017 so far.
Thus, for providing an edge to a portfolio, broad-based investment into emerging market equities as an asset class may not be the most ideal strategy given the strong returns already provided in recent years.