When you think about investing globally, emerging markets cannot be ignored as they represent more than 50% of the world economy. Over the next five years, the emerging markets are expected to grow, on average, 3% to 3.5% more rapidly than developed economies, according to an April forecast from the International Monetary Fund1. It’s no surprise investors want to take part in this growth.
We often receive feedback from investors who say they’re interested in emerging markets. Sometimes they tell me that they invest in the MSCI Emerging Markets Index to get a bit of exposure to everything. Some of those investors want access to the index because of its seemingly broad diversification in market cap, country and sector.
Now, don’t get me wrong – I have no issue with people seeking exposure to the indices. But I think the important thing is to know what you’re buying. With that said, below are three main attributes of the MSCI Emerging Markets Index that investors should keep in mind.
Market-cap concentration: The index may include more than 800 companies, but 40 of those companies make up almost 40% of the index – this represents a large concentration. This translates to the biggest 5% of companies in the index dictating 36% of index performance. Furthermore, many of these large companies are partly state-owned, where corporate governance and alignment with shareholders interest are not transparent.
Country concentration: Generally the BRIC countries (Brazil, Russia, India and China) come to mind when you think of an emerging markets index. Many investors think that’s what they are getting with the MSCI Emerging Markets Index, but that’s not necessarily the case. Even though the index states that it invests in 21 countries, there are five big countries with substantial weightings, so it’s not really diversified. As shown in the chart below, China, Korea, Taiwan, Brazil and South Africa actually account for 65% of the MSCI Emerging Markets Index.
Sector concentration: Many investors seek emerging markets to participate in the growth of the middle class. The index’s sector composition shows a very different story, with the financial and commodities sectors accounting for 27% and 20%, respectively (as at May 23, 2014). The index had relatively lower exposure to the domestic consumer sector, an area that provides access to middle-class growth opportunities.
How does our Fund compare?
Trimark Emerging Markets Class is managed using a highly selective and far more active approach than the index. Given that the index includes over 800 companies, our watch list of 150 companies might make us sound lazy. But we’ve meticulously researched and analyzed each of those 150 companies. With our emphasis on quality, our narrower list contains companies we believe have the most potential.
When comparing the Fund’s holdings to the benchmark, the Fund has an active share score of 92, which means only 8% of the portfolio overlaps its benchmark (as at May 31, 2014)2. The Fund’s country composition is also quite different because we can pick and choose the regions we invest in, rather than being buyers of market cap. As a result of our active approach, the Fund offers investors direct access to emerging markets and higher quality companies than the index.
Learn more about the Trimark Emerging Market Class and Trimark Investments team.
1IMF, World Economic Outlook Database, April 2014
2Active share is a holdings-based metric used to compare the holdings in a fund versus the benchmark.
Please note: You cannot invest directly in an index.