Equity Emerging Markets Global funds’ performances range from -43.56% to 7.49% over the last 52 weeks (ending October 28, 2011), in EUR terms. On average, the best 5% of the funds outperform the market (pegged to the MSCI Emerging Markets Index) by approximately 7.95% and the worst 5% underperform by approximately 14.04%. We last analyzed this asset class back in November 2010 and found that at the time, as a group, the best funds outperformed the benchmark by 22% and the worst funds underperformed by 16%. Economic uncertainty throughout the developed world coupled with fears of overheating and slowing emerging markets have negatively impacted the overall performance of the funds in this universe.
Of the top funds in our analysis a year ago, 18.75% remain in the top funds’ portfolio while the same percentage now make up the bottom funds’ portfolio this year; 18.75% of the funds in the portfolio were reclassified into different categories. Of the bottom funds a year ago, 12.5% remain at the bottom, 6.25% either merged with another fund or were liquidated, and 6.25% were reclassified. It must be noted that all funds have experienced a very marked increase in volatility on a rolling 12 week basis, roughly doubling over the last 3 months of the analysis.
We examine factors describing the best and worst performing funds on an aggregate basis. When funds are aggregated in a group, their common factors crystallize and specific bets are diversified away, which provides the basis for such an analysis. The analysis suggests that the top and bottom funds, on average, were exposed to emerging market segments which can help explain their very diverse performance. Please note that our conclusions may change if a different timeframe is used to select the best/worst funds.
Selection of Top/Bottom Fund Groups
– Based on the universe of 320 funds, the total annualized performance is calculated during the last 52 weeks to rank the funds. Using the top 5% (16 funds) and bottom 5% (20 funds) equally weighted, daily rebalanced portfolios are created to try to identify why, on average, one group performed better in terms of style exposures.
– The top 5% funds’ cumulative returns are approximately 7.95% higher than the MSCI Emerging Markets Index while the returns of the bottom 5% are 14.04% lower. In the chart below we include the results for the top funds and bottom funds as of our original analysis of November 2010. It is worth noting that the market volatility over the last 3 months has increased, and that the best funds, by successfully managing their risk, avoided the steep drop in performance suffered by the rest of the peer group.
– It appears that there was no performance persistence for the top funds of November 2010 over the last 52 weeks. These funds underperformed the benchmark and remained consistently below the median of the peer group. However, it appears as if the bottom funds of November 2010 made changes that allowed them to improve their performance and managed to outperform the top funds of 2010.
Chart 1: Cumulative Performance Chart
Returns-Based Style Analysis Highlights
– The average RBSA style loadings show that the peer universe, comprised of 320 funds, is diversified with exposures across all regions, with EM Asia making up close to 48%, EM Latin America close to 17%, and EM EMEA close to 20% of the exposures. Cash and cash equivalent exposures make up a little over 3% and EM Bonds make up 6%. The rest is approximately equally divided among exposures to the USA and Europe.
– When comparing these results to the results of the same analysis done last year (“Global Emerging Markets Equity” November 2010), it becomes evident that the style exposures for the peer group are similar. On an aggregate basis, the peer group’s behaviour is consistent, with exposures to EM Asia, Latin America, and EMEA making up close to 85% of the total exposures.
– Using MSCI EM style and regional indices as well as the BarCap Global EM Bond Index factors, our RBSA analysis demonstrates that the top and bottom funds have exposures to different factors. As shown in Chart 2 below, the top funds had a large exposure to Global EM Bonds (proxied by the BarCap Global EM Bond index). The exposure to EM Bonds was constant, but shows an increase from an average of 20% to 30% over the past 6 months. On the other hand, the bottom funds’ portfolio show an exposure to EM Bonds that is half of that of the top funds; the biggest difference in exposures is within Asia EM, with the top funds favoring Large Caps, while the bottom funds favored Small and Medium Caps. The exposures to EM Latin America and EMEA Smid are similar for both groups of funds.
– As expected, the benchmark displays no exposure to cash or cash equivalents, proxied by the EONIA Index. Comparing the exposures of the portfolio and benchmark helps us understand the excess performance sources for the top and bottom portfolios.
Chart 2: Universe, Funds’, and Benchmark Average Asset Loadings
– The most recent exposures for the top and bottom funds of our November 2010 analysis show that the funds have changed their style over the past 52 weeks. These exposures can be compared to those for the most recent top and bottom funds. The top funds of 2011 outperformed the top funds of 2010 due to having a larger exposure to EM Bond and EM Asia Large Caps, while having a smaller exposure to EM Asia Smid. The bottom funds of 2011 underperformed the bottom funds of 2010 because they had a lower exposure to cash or cash equivalents, EM Bonds, and EM Asia Smid.
– It is interesting to note that the bottom funds of 2011, with exception of their exposure to EM Bonds, show similar exposures than those for the best funds of 2010. In this case, it appears that the bottom managers sought to improve performance by emulating the exposures of the best managers of the previous year. However, as markets have moved, the same strategy that proved to be a winner in the past did not hold over the past year, causing both groups of funds to lag the benchmark and their peers.
– Style attribution analysis shows that the constant overweight exposure to EM Bonds is the main factor behind the top funds’ above average performance. On the other hand, the bottom funds overweight exposure to emerging Asia Smid was the most damaging bet. Although both funds are overweight in EM Bonds, it is the dynamic of the exposures that causes for this excess exposure to contribute positively to the top funds’ performance, but negatively for the bottom funds’. The bottom funds exposure to EM bonds was not constant over time and ranged from almost 21% of the portfolio at the beginning of the period, to 0% around March 2011 and back to 10% by the end of October 2011.
Chart 3: Excess Return Contribution
Conclusions
During a turbulent year of uncertainty for world equity markets, only 8 out of 320 funds (i.e. 2.5%) managed to generate positive returns over the 52 weeks ending on October 30th 2011. A portfolio created from the top 5% best performing funds would have generated positive returns in excess of the benchmark, although the absolute performance was of 3 basis points. It is important to understand how the best performing funds managed to stay on top and avoid the losses suffered by the rest of their peers. A sizable exposure to EM Bonds, which increased over the past 6 months, helped the top funds suffer the same losses suffered by the benchmark and the rest of the universe. On the other hand, the worst performing funds’ 44% exposure to Asia Smid, which lost almost 17% on a cumulative basis, hurt their overall performance.
UNIVERSE DEFINITIONS & ASSUMPTIONS
• Database provider: Lipper, a Thomson Reuters Company
• Registered for sale countries: Austria, France, Germany, Italy, Netherlands, Offshore, Spain, Sweden, Switzerland, and the UK
• Filters: Primary share class, at least 1 year of performance history, Asset Type: Equity, Geographical Focus: Global, Lipper Global Category: Equity Emerging Markets, AUM: minimum EUR 10 Million, Denominated in EUR, USD and GBP. Equity Emerging Markets, as classified by Lipper, are “Funds with the primary objective to invest in Equity Markets across the globe.”
• Number of funds analyzed: 320
• Date interval: Last 52 weeks starting on November 1, 2010 and ending on October 28, 2011
• RBSA Model: Locally Weighted Regression
• Currency: EUR
• Analysis frequency: Weekly (with compounded daily data)
• Cash proxy (Risk Free Rate): EONIA Index
• Benchmark: MSCI Emerging Markets Index
• Style factors: BarCap Global Emerging Markets Index, MSCI USA, Europe, EM ASIA Large and Smid, EM Latin America Large and Smid, and EM EMEA Large and Smid Indices.
• Analysis performed with mpi Stylus Pro™
Style Return: Return of the Best Fit Portfolio for the Manager Series, where the holdings of the portfolio are the Style Indices.
Selection Return: Calculated as the Manager’s Return subtracted by the Style Return. This is an indication of the Manager’s Selection or Stock Picking abilities.
Timing Return: Calculated as the Manager’s Style Return subtracted by the Benchmark’s Style Return. This indicates whether the Manager’s decisions, to over or under weight the style holdings, as compared to the benchmark, added to the portfolio’s return or not.
Style R Squared (R2): Measure of the model’s power in describing the Manager’s past behaviour in terms of style. The higher the Style R Squared value, the better the model’s explanatory power.
Predicted Style R Squared (PR2): Measure of the model’s power in predicting the Manager’s future behaviour in terms of style. The higher the Predicted Style R Squared value, the better the model’s predictive power.
Style Map: Graphic representation of the results of the Style Analysis. The series being analyzed are mapped unto a Cartesian plane, in which the X and Y axis represent exposures to different Styles and Sizes.
Asset Loadings: Weights of the Style Indices, as holdings, of the Style Portfolio, as calculated by mpi Stylus Pro.
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