Passive Management Wins in Emerging Markets

Last Updated Sep 12, 2011 12:07 PM EDT

I was recently asked about the performance of funds run by Mark Mobius, who has been called a global pioneer by BusinessWeek. Mobius made his mark in emerging market funds, so it got me thinking about the performance of active emerging market funds as a whole. As it turns out, the picture isn't pretty.

First, let's see how Mobius has performed. Keep in mind that Asiamoney named him as one of the Top 100 Most Powerful and Influential People in 2006, stating that he "boasts one of the highest profiles of any investor in the region and is regarded by many in the financial industry as one of the most successful emerging markets investors over the last 20 years."

The first thing I did was to go back to an analysis I did on active management in emerging markets covering the 10-year period ending in 2006. For that period, Templeton Developed Markets (TEDMX) returned 8.7 percent per year. This compared with a 10.2 percent return per year for the DFA Emerging Markets Portfolio (DFEMX) and a 9.3 percent per year return for the Vanguard Emerging Markets Fund (VEIEX).

The next step was to update the data. The following are the returns for the 10-year period ending August 30, 2011.

Mobius also runs the Templeton Emerging Markets Small Cap Fund (TEMMX), which has an inception date of Oct. 2, 2006. For the three-year period ending August 30, 2011, the fund returned 9.1 percent. By comparison, the DFA Emerging Markets Small Cap Portfolio (DEMSX) returned 12.7 percent, outperforming TEMMX by 3.6 percent.

A very persistent investing myth is that active management is the winning strategy in so-called inefficient markets (such as small-caps and emerging markets. As my colleague Vladimir Masek put it: "If the 'active camp' is right, and bright, experienced, hard-working managers like Mobius can take advantage of market inefficiencies, then we should see them outperform market benchmarks by wide margins in the most inefficient markets, for example in emerging markets."

The evidence presented can't tell us how bright or hard-working Mobius is, as we know he's both. Instead, it can tell us which camp is more likely to be right. More supporting evidence would make the case stronger, so now we'll broaden our look to include a wide universe of emerging market funds.

  • Larry Swedroe On Twitter»

    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.