Should you be active in emerging markets?
(MoneyWatch) The argument is pretty simple: Emerging markets are among the most likely to be inefficient, so that's where active fund managers can generate outstanding returns. However, the evidence says that's simply not true.
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Prompted by my recent interview with Seeking Alpha, a reader asked what emerging markets fund he should use. That led me to check the performance of passive emerging markets funds of Dimensional Fund Advisors and Vanguard (disclosure: My firm, Buckingham Asset Management, primarily uses Dimensional Fund Advisors funds in constructing client portfolios.)
- Vanguard Emerging Markets Stock Index Fund (VEIEX)
- DFA Emerging Markets Portfolio (DFEMX)
- DFA Emerging Markets Small-Cap Portfolio (DEMSX)
- DFA Emerging Markets Value Portfolio (DFEVX)
If active management was the winner's game, we would expect to see the majority of active funds outperforming. The table below shows the returns data provided by Morningstar for the 10- and 15-year periods, where available, ending Jan. 11.
It's pretty tough to claim that emerging markets are inefficient when passive funds fared so well and DFEVX was in the first percentile. And this performance is all based on pre-tax results. It's highly likely that the after-tax results would be even less favorable for the actively managed funds, as their generally higher expenses typically results in less tax efficiency.
There are two conclusions we can draw from the data:
- Emerging markets aren't as inefficient as active managers claim.
- Passive management is most likely to prove to be the winning strategy.
With the clear evidence in favor of passive management in yet another arena, it seems that active managers have very little left to hang their hats on.
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