Emerging markets, strategy, in style, man balances on the strategy that cuts its way through all obstacles

Investment Tactics

Balance Investment Styles for a Better Emerging Markets Strategy

10 Feb 2020

3 min read

Drive better results in an emerging markets portfolio with a balanced investment style.

Having one style may help you stand out in a crowd . . . until your style falls out of favor. You need balance. The same could be said when investing in emerging market (EM) equities. To access the long-term opportunities of emerging markets while mitigating some of the risks, investors need an emerging markets strategy with a balanced approach to equity style where individual stock selection can drive performance.

Some Emerging Markets Strategies Have Drawbacks:

Benchmark aware – These strategies have country and sector weightings within set ranges of an index. They generally have a large number of holdings in order to achieve the targeted sector and country exposures. Risk and return of these benchmark-aware strategies can be driven by allocation (country/sector decisions) and factor exposures, sometimes unbeknownst to the portfolio manager. What happens to a portfolio that requires exposure to a sector that’s in line with the MSCI EM Index when that sector sells off?

Style pure – By mandate or manager preference, these strategies are designed around either growth or value stocks. The potential problem with these types of strategies is that volatility can increase when the market experiences an abrupt style rotation, or ‘flips’ from growth to value (and vice versa). While this is not unique to EM, the reversals in EM can happen more frequently and more quickly than in developed markets (see chart below). The impact of these rotations can be amplified due to emerging markets having generally lower liquidity.

Investment Style Rotations Can Happen Abruptly

MSCI Emerging Markets Value/Growth Return Spread, Monthly Style Performance in Emerging Markets (2018–2021)

Past performance does not guarantee future results

Source: Morningstar Direct

A Balanced Emerging Markets Strategy May Help Mitigate Risk

An EM strategy that’s balanced by style can offer a way for investors to weather abrupt and frequent style rotations between growth and value stocks in emerging markets. A portfolio that’s constructed from three style baskets—growth, value and blend stocks—spreads risk across the style spectrum, potentially smoothing the return stream when one style is outperforming the other.

Emerging markets portfolio construction creates opportunities

Emerging market equities are roughly split between growth and value, with variations cutting across and within sectors. EM stocks that are sensitive to interest rates, for example, are relatively split between the two styles. Thus, a strategy that diversifies across styles is able to take advantage of opportunities across the whole EM universe. Furthermore, there is a tendency for value and growth stocks to be positively correlated across countries and sectors, so benefits from diversification are more a function of style mix (blend of growth and value) and not how much country or sector exposure a manager has in their portfolio.

A Portfolio of Balanced Investment Styles Drives Results

A strategy that’s focused on style balance has the benefits of diversification baked in. This enables the strategy to build a concentrated portfolio of best ideas instead of having to diversify through a variety of countries and/or sectors, as seen with benchmark-aware strategies.

Having an individual style can hold you back when that style gets old. Add some balance to get in front of the crowd.

Important Information

The performance data quoted represents past performance; it does not guarantee future results.

Investments carry risks, including possible loss of principal.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Please see our glossary for a definition of terms.

The MSCI Emerging Markets Index (MSCI Emerging Markets NTR) is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

The MSCI Emerging Markets Value Index captures large- and mid-cap securities exhibiting overall value style characteristics across 26 Emerging Markets (EM) countries. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.

The MSCI Emerging Markets Growth Index captures large- and mid-cap securities exhibiting overall growth style characteristics across 26 Emerging Markets (EM) countries. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

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