New research by MSCI shows a rare insight into whether the factor phenomenon, driving development market equities beta, is at play in emerging markets. The research uses the Barra Emerging Markets Equity Model to look at the drivers of performance of emerging markets, and analyses the returns of active emerging market managers to identify the factors they have exploited. The research reveals some interesting results.
The paper, “Factoring” in the Emerging Markets Premium, seeks to uncover the performance for factor indexes in emerging markets.
It also asks whether significant emerging markets factor premia are a recent phenomenon, whether emerging markets active managers are exploiting all of the opportunities presented by these factor premia, and whether there are ways that active emerging markets managers can capture additional factor premia.
As with developed markets, the research finds, that a significant portion of active manager returns can be attributed to emerging markets beta. High dividend yield and momentum factors were also significant contributors, suggesting that active emerging market managers have been harvesting systemic factors in their investment process.
Other premia factors such as value, low size, quality and low volatility that have demonstrated outperformance over the broader market did not appear to be significant drivers of active emerging markets managers’ returns, suggesting that these factors offer interesting opportunities as complementary investment strategies.