For those that invest in Emerging Markets - Go ACTIVE?

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Always passive
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For those that invest in Emerging Markets - Go ACTIVE?

Post by Always passive »

I have been investing a small portion of my equity portfolio in Emerging Markets using either iShares or Vanguard and most recently in Avantis ETFs. But with the recent developments in China (some political, so let us not discuss them here), I began to wonder. However, Emerging Markets is an very integral part of the global GDP future, their stocks seem to be cheaper than the US by far, specially the over inflated tech ones, so I think that there is no alternative but to invest there.
So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Nathan Drake »

Wait for AVES. Active fund with relatively low ER.

Yes I think it’s better to go for slightly active and tilt to Value.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by rob »

Sure some of the new restrictions are bad but the US is hardly the paragon of high accounting standards... Unless the active mgr knows these restrictions ahead of the rest of the market how are they supposed to do anything about it. The track record for active anywhere is pathetic, although it has better marketing. I'm sticking with the indexes...
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Nathan Drake »

rob wrote: Sun Sep 19, 2021 12:46 am Sure some of the new restrictions are bad but the US is hardly the paragon of high accounting standards... Unless the active mgr knows these restrictions ahead of the rest of the market how are they supposed to do anything about it. The track record for active anywhere is pathetic, although it has better marketing. I'm sticking with the indexes...
Everything is active, even an S&P 500 index fund.

Active does not mean bad, only if the costs are high and the systems used to manage the fund are more like stock picking than going for broad diversification
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by rob »

Nathan Drake wrote: Sun Sep 19, 2021 1:02 am Active does not mean bad, only if the costs are high and the systems used to manage the fund are more like stock picking than going for broad diversification
The evidence is clearly against the unicorns....
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Always passive »

rob wrote: Sun Sep 19, 2021 12:46 am Sure some of the new restrictions are bad but the US is hardly the paragon of high accounting standards... Unless the active mgr knows these restrictions ahead of the rest of the market how are they supposed to do anything about it. The track record for active anywhere is pathetic, although it has better marketing. I'm sticking with the indexes...
I assume that they may underinvest in companies, whose investment models seem to be inconsistent with the Chinese government philosophy
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Always passive »

Nathan Drake wrote: Sun Sep 19, 2021 12:41 am Wait for AVES. Active fund with relatively low ER.

Yes I think it’s better to go for slightly active and tilt to Value.
You mean EM value. Has Aventis stated that it is in the plans?
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by redbarn »

According to the SPIVA scorecards, the percent of US-based active emerging market funds that underperform the emerging market index benchmark in the long run (20 years) is over 92%. The case for indexing is no weaker than for US or developed international stocks.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by YRT70 »

Always passive wrote: Sun Sep 19, 2021 1:22 am
Nathan Drake wrote: Sun Sep 19, 2021 12:41 am Wait for AVES. Active fund with relatively low ER.

Yes I think it’s better to go for slightly active and tilt to Value.
You mean EM value. Has Aventis stated that it is in the plans?
Yes you can find details in the other thread. It's available the 30st this month. It apparently targets value, profitability and size.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Always passive »

YRT70 wrote: Sun Sep 19, 2021 2:34 am
Always passive wrote: Sun Sep 19, 2021 1:22 am
Nathan Drake wrote: Sun Sep 19, 2021 12:41 am Wait for AVES. Active fund with relatively low ER.

Yes I think it’s better to go for slightly active and tilt to Value.
You mean EM value. Has Aventis stated that it is in the plans?
Yes you can find details in the other thread. It's available the 30st this month. It apparently targets value, profitability and size.
Thank you. Very timely
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Always passive »

redbarn wrote: Sun Sep 19, 2021 1:23 am According to the SPIVA scorecards, the percent of US-based active emerging market funds that underperform the emerging market index benchmark in the long run (20 years) is over 92%. The case for indexing is no weaker than for US or developed international stocks.
That is a certainly a fact. But now I think that we should assume the China is reversing and I doubt you can consider it any longer an efficient market. Passive does not do well in these markets.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by redbarn »

If you are pretty convinced Chinese stocks are not a good investment right now, it's possible to avoid or reduce exposure to them by using an ex-China emerging markets index (e.g. EMXC). I have trouble seeing how active management is likely to help. Efficient market or not, the arithmetic of index investing still holds: for every dollar in the Chinese market that outperforms the Chinese index, a dollar has to underperform. After fees, beating the index is a negative sum game. One could try to argue that US-based funds investing in China will do better than other active investors in the Chinese market but in a market that is becoming more political and capricious, I would expect US funds to be at a disadvantage if anything.
Always passive wrote: Sun Sep 19, 2021 3:38 am
redbarn wrote: Sun Sep 19, 2021 1:23 am According to the SPIVA scorecards, the percent of US-based active emerging market funds that underperform the emerging market index benchmark in the long run (20 years) is over 92%. The case for indexing is no weaker than for US or developed international stocks.
That is a certainly a fact. But now I think that we should assume the China is reversing and I doubt you can consider it any longer an efficient market. Passive does not do well in these markets.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by burritoLover »

Always passive wrote: Sun Sep 19, 2021 12:32 am I have been investing a small portion of my equity portfolio in Emerging Markets using either iShares or Vanguard and most recently in Avantis ETFs. But with the recent developments in China (some political, so let us not discuss them here), I began to wonder. However, Emerging Markets is an very integral part of the global GDP future, their stocks seem to be cheaper than the US by far, specially the over inflated tech ones, so I think that there is no alternative but to invest there.
So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
If anything, active fund managers tend to take on more risk to beat their benchmark - you may find them overweighting China after its been beat down.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nisiprius »

Link for Redburn's source: SPIVA scorecard, p. 17.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nisiprius »

Always passive wrote: Sun Sep 19, 2021 3:38 am...But now I think that we should assume the China is reversing and I doubt you can consider it any longer an efficient market. Passive does not do well in these markets.
What's your evidence for your statement that passive does not do well in inefficient markets?
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by stan1 »

nisiprius wrote: Sun Sep 19, 2021 10:46 am According to the SPIVA [https://www.spglobal.com/spdji/en/docum ... d-2020.pdf]SPIVA scorecard[/url], over the last 20 years 92.21% of actively managed emerging markets fund underperformed their benchmark. Do you feel lucky?
Right, but a lot of actively managed emerging market funds have very high expense ratios, over 2%. With AVES coming in at 0.36% that's definitely going to be a differentiating factor. No surprise that high expense ratio funds underperform a low cost index.

Here's the comparison between VEIEX and DFEMX since 1995 (yes it is necessary to adjust time periods). Expense ratios on both have dropped over time, but have always been well under the category average.

Will history repeat itself? I don't know.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nedsaid »

rob wrote: Sun Sep 19, 2021 1:09 am
Nathan Drake wrote: Sun Sep 19, 2021 1:02 am Active does not mean bad, only if the costs are high and the systems used to manage the fund are more like stock picking than going for broad diversification
The evidence is clearly against the unicorns....
Avantis and DFA, while not really active aren't really passive either. Suffice to say that they employ lower cost, lower turnover investment strategies. The biggest reason that active management fails are the fees. Vanguard actually has good low cost active funds, heard good things here about PrimeCap, Wellington, Wellesley, etc. I owned Vanguard International Growth at one time and it outperformed the indexes.

What I will say is that with the indexes, the odds are with you. Even if the fees for passive and active were identical, only some active managers would beat the market and fewer could do it on a consistent basis.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nedsaid »

For the record, Avantis Emerging Markets Equity ETF has portfolio turnover of 8% and holds 3,100 stocks. That sounds pretty indexy to me. The expense ratio is 0.33%. Not bad. The competing Vanguard Emerging Markets Index Admiral shares have an expense ratio of 0.14%. Vanguard holds 4,316 stocks in its index. Avantis stocks have somewhat lower market caps and have a Value tilt compared to Vanguard.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

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Always passive wrote: Sun Sep 19, 2021 12:32 am I have been investing a small portion of my equity portfolio in Emerging Markets using either iShares or Vanguard and most recently in Avantis ETFs. But with the recent developments in China (some political, so let us not discuss them here), I began to wonder. However, Emerging Markets is an very integral part of the global GDP future, their stocks seem to be cheaper than the US by far, specially the over inflated tech ones, so I think that there is no alternative but to invest there.
So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
VIGI is your best bet.

I have invested in schy but not sure whether it will perform better than VIGI.

SCHY has some value tilt but international is not egregiously over valued like domestic so VIGI should be good enough.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Nathan Drake »

nedsaid wrote: Sun Sep 19, 2021 11:07 am
rob wrote: Sun Sep 19, 2021 1:09 am
Nathan Drake wrote: Sun Sep 19, 2021 1:02 am Active does not mean bad, only if the costs are high and the systems used to manage the fund are more like stock picking than going for broad diversification
The evidence is clearly against the unicorns....
Avantis and DFA, while not really active aren't really passive either. Suffice to say that they employ lower cost, lower turnover investment strategies. The biggest reason that active management fails are the fees. Vanguard actually has good low cost active funds, heard good things here about PrimeCap, Wellington, Wellesley, etc. I owned Vanguard International Growth at one time and it outperformed the indexes.

What I will say is that with the indexes, the odds are with you. Even if the fees for passive and active were identical, only some active managers would beat the market and fewer could do it on a consistent basis.
I see Avantis / DFA as a way to capture specific premium loadings that aren't widely available through normal indexes.

If you want to go for high SCV loadings it's more efficient to do so in DFA / Avantis, and the additional SMB and HML loadings vs. a Russell 2000 Value fund is worth it for the additional cost to manage the fund, if you believe the premiums will persist into the future.

But I do agree it may not be worth it for large caps. I still like to hold the cheapest MCW funds for my large cap blend. But if you go smaller and more into value for tilts, I think it's best to look beyond the basic indexes.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nedsaid »

Nathan Drake wrote: Sun Sep 19, 2021 1:46 pm
nedsaid wrote: Sun Sep 19, 2021 11:07 am
rob wrote: Sun Sep 19, 2021 1:09 am
Nathan Drake wrote: Sun Sep 19, 2021 1:02 am Active does not mean bad, only if the costs are high and the systems used to manage the fund are more like stock picking than going for broad diversification
The evidence is clearly against the unicorns....
Avantis and DFA, while not really active aren't really passive either. Suffice to say that they employ lower cost, lower turnover investment strategies. The biggest reason that active management fails are the fees. Vanguard actually has good low cost active funds, heard good things here about PrimeCap, Wellington, Wellesley, etc. I owned Vanguard International Growth at one time and it outperformed the indexes.

What I will say is that with the indexes, the odds are with you. Even if the fees for passive and active were identical, only some active managers would beat the market and fewer could do it on a consistent basis.
I see Avantis / DFA as a way to capture specific premium loadings that aren't widely available through normal indexes.

If you want to go for high SCV loadings it's more efficient to do so in DFA / Avantis, and the additional SMB and HML loadings vs. a Russell 2000 Value fund is worth it for the additional cost to manage the fund, if you believe the premiums will persist into the future.

But I do agree it may not be worth it for large caps. I still like to hold the cheapest MCW funds for my large cap blend. But if you go smaller and more into value for tilts, I think it's best to look beyond the basic indexes.
Yep. If you want to load on certain factors like Size, Value, and Profitability, there is a cost for the managers to do that analysis. The hope is that the factor premiums will show up and that Avantis will outperform a similar Vanguard Index which does no screening for factors. You should get higher performance though you are paying higher fees. No guarantees of course, but that is the thinking behind owning the more expensive factor funds.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by secondopinion »

Always passive wrote: Sun Sep 19, 2021 12:32 am I have been investing a small portion of my equity portfolio in Emerging Markets using either iShares or Vanguard and most recently in Avantis ETFs. But with the recent developments in China (some political, so let us not discuss them here), I began to wonder. However, Emerging Markets is an very integral part of the global GDP future, their stocks seem to be cheaper than the US by far, specially the over inflated tech ones, so I think that there is no alternative but to invest there.
So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
I do not think going active is the best option. If you are merely avoiding China, then there are better ways.

Like mentioned earlier, EMXC is a good choice at net 0.25% ER with gross ER of 0.34%. VXUS is 0.08% but VEA is 0.05%, a 75/25 VEA/EMXC is 0.10%. Unless you are taking a major EM slant, it is actually affordable despite the higher fees of EMXC. Of course, this doubles up Korea.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by arcticpineapplecorp. »

read this and take a look at the last row and then what do you conclude about active management's success in the emerging market space?

Image

source:
https://oncoursefp.com//images/Vectors% ... 0final.pdf
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nisiprius »

stan1 wrote: Sun Sep 19, 2021 10:58 am...Here's the comparison between VEIEX and DFEMX...
For the record, then, you personally consider DFA's funds to be "actively managed?"
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by stan1 »

nisiprius wrote: Sun Sep 19, 2021 5:16 pm
stan1 wrote: Sun Sep 19, 2021 10:58 am...Here's the comparison between VEIEX and DFEMX...
For the record, then, you personally consider DFA's funds to be "actively managed?"
That's a good question, of course. OP didn't cite any examples of what funds he has in mind.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by whereskyle »

Always passive wrote: Sun Sep 19, 2021 12:32 am I have been investing a small portion of my equity portfolio in Emerging Markets using either iShares or Vanguard and most recently in Avantis ETFs. But with the recent developments in China (some political, so let us not discuss them here), I began to wonder. However, Emerging Markets is an very integral part of the global GDP future, their stocks seem to be cheaper than the US by far, specially the over inflated tech ones, so I think that there is no alternative but to invest there.
So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
https://www.spglobal.com/spdji/en/resea ... hts/spiva/

For Brazil and India, indices have outperformed more than 80% of mutual funds over the past 5 years.

So, I would say, absolutely not.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

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arcticpineapplecorp. wrote: Sun Sep 19, 2021 2:42 pm read this and take a look at the last row and then what do you conclude about active management's success in the emerging market space?

Image

source:
https://oncoursefp.com//images/Vectors% ... 0final.pdf
arcticpineapplecorp:

The SPIVA study you posted should be seen by investors who believe their favorite fund manager will outperform the index.

Thank you for your post!

Best wishes.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nedsaid »

nisiprius wrote: Sun Sep 19, 2021 5:16 pm
stan1 wrote: Sun Sep 19, 2021 10:58 am...Here's the comparison between VEIEX and DFEMX...
For the record, then, you personally consider DFA's funds to be "actively managed?"
I will chime in here. Avantis or DFA are not the classic active fund managers. They will set the stock screens for whatever they are looking for and then buy all of the stocks that match. A classic active fund will usually have between 40-200 stocks in it. The Avantis Emerging Markets ETF had 3,100 stocks and an 8% turnover. A classic active fund will have turnover of at least 20-30% and 100% or more turnover is not uncommon. So these factor type of funds that Avantis and DFA run aren't really active but I would say that they are almost passive. So there is sort of a middle ground. Larry Swedroe would say that Avantis and DFA are passive but I would say almost but not quite there.

A classic indexer will follow a published index or use a proprietary index. But you could argue that Index Funds that screen for factors like the two Vanguard Small Value Funds: one uses the CRSP Small Cap Value Index and the other uses S&P 600 Small Cap Value Index, are actually factor funds. Depending upon how narrow of a market segment your index is trying to capture, you could be in for greater portfolio turnover than what you would see in the S&P 500 or U.S. Total Stock Market Indexes. So is an index fund necessarily passive? In the case of a Momentum Index, I would think not. In the case of a Small Cap Value Index, I would say almost.

A big key for me is turnover. If a "passive" index fund has 20% portfolio turnover or greater, I would say, "No way Jose." Another would be number of stocks in the portfolio, if an index had 50 stocks in it, the answer would be no. I would expect hundreds if not thousands of stocks in a truly passive portfolio.

Here is the continuum:

Active>>>>>Low Turnover Factor Funds>>>>Passive.

So this can get down to semantics and splitting of hairs. To me, when I look at a definition for passive, I look for three things: the number of stocks in the portfolio, portfolio turnover, and expense ratio. A Total Stock Market Index would meet all three tests for passive. The two Vanguard Small Value Funds would meet two of the tests and perhaps the third. The Avantis Emerging Markets ETF that I analyzed earlier would with 3,100 stocks and an 8% portfolio turnover meets two of the tests, but the expense ratio seems high for a truly passive fund. So it does get a bit murky here. Plus Avantis hires analysts to evaluate data, the academic research, and probably individual securities. If you are just replicating an index, your need for research is more limited.

Which brings up another point. Indexers will use sampling techniques for the smaller Small Caps and for the Micro Caps, many of the really small companies in a Total Market Index just might not be investable for a huge company like Vanguard. You get market impact cost if you place a large trade for a very thinly traded stock, so a stock would have to meet a certain trading volume. It would also involve patient trading techniques. So with very small and less liquid companies, Vanguard has to sample in order to replicate the results of those sectors of the market. So the indexers are doing some stock pickin'. And they use options and futures. Simple indexin' gets to be rather sophisticated.

So it gets a bit murky. In the case of Vanguard Total Stock Market Index, samplin' or no samplin', it would meet my criteria for a truly passive investment. It is pretty doggoned close and you have to realize that in certain cases, 100% pure indexing is impossible. So like Ivory Soap, 99 40/100% pure is good enough.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

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Always passive wrote: Sun Sep 19, 2021 12:32 am So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
If I did consider active, I'd divide the investment between maybe five to ten active EM funds, definitely not just one.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Noobvestor »

Username doesn't check out. But anyway: nope, I'm tilted toward EM, but passively so. Seems like a bargain right now, but who knows.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Jaymover »

Not sure if anyone mentioned it but there is a great recent Bogleheads podcast:

https://rickferri.com/podcast/episode-3 ... ick-ferri/

Although he has an ETF to sell, Jason makes a good case for active management of Chinese shares.

Interesting point that contrary to public opinion, there is very little due diligence applied to Chinese companies prior to entering the US stock exchange compared to the Chinese exchange. Basically the rubbish ends up on the US stock exchange.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by smectym »

I note a large real estate conglomerate in China may be on the verge of default: unclear what the ripple effects may be; and also, opaque whether the regime will step in to rescue Evergrande

https://www.reuters.com/business/fitch- ... 021-09-15/
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by secondopinion »

tibbitts wrote: Sun Sep 19, 2021 6:42 pm
Always passive wrote: Sun Sep 19, 2021 12:32 am So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
If I did consider active, I'd divide the investment between maybe five to ten active EM funds, definitely not just one.
Oh dear. This pays all the fees to achieve something that approximates the index.

Stick with one or two active funds, or just buy the index.

For those just ex-China, there is EMXC. If you want just some of K-TIMBRS (this is BRIC [without China], Taiwan, S. Korea, Mexico, and South Africa), there are slightly cheaper options. Active funds are not required to obtain positions in selected countries.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by tomsense76 »

arcticpineapplecorp. wrote: Sun Sep 19, 2021 2:42 pm read this and take a look at the last row and then what do you conclude about active management's success in the emerging market space?

source:
https://oncoursefp.com//images/Vectors% ... 0final.pdf
Wow! It's just staggering how poorly active managers have done in EM. Thanks for sharing this :sharebeer

It's also interesting to see the value segments where active has done better (though still pretty bad). To the points noted by other posters above, I wonder if they are including DFA, Avantis, Alpha Architect, etc. in active or if they view those as passive

(snipped image to keep quoted text short. it can be viewed in the OP above)
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by tibbitts »

secondopinion wrote: Mon Sep 20, 2021 2:20 pm
tibbitts wrote: Sun Sep 19, 2021 6:42 pm
Always passive wrote: Sun Sep 19, 2021 12:32 am So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
If I did consider active, I'd divide the investment between maybe five to ten active EM funds, definitely not just one.
Oh dear. This pays all the fees to achieve something that approximates the index.

Stick with one or two active funds, or just buy the index.

For those just ex-China, there is EMXC. If you want just some of K-TIMBRS (this is BRIC [without China], Taiwan, S. Korea, Mexico, and South Africa), there are slightly cheaper options. Active funds are not required to obtain positions in selected countries.
The purpose of active would be to eek out .1 or .2% annually above the increased expenses while minimizing the additional (vs. an index) downside risk. I don't see that one or two active funds accomplishes that as well as five or six. At some point - before you hit dozens of funds at least - probably the downside risk has been sufficiently minimized (along of course with the "risk" of outside gains.) It's true that you probably get closer to an index the more funds you buy, so that's another reason not to buy every available fund.

You're wanting the fund managers to pick those countries for you, not just pick specific equities. Again, that's if you want active management.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by secondopinion »

tibbitts wrote: Mon Sep 20, 2021 3:16 pm
secondopinion wrote: Mon Sep 20, 2021 2:20 pm
tibbitts wrote: Sun Sep 19, 2021 6:42 pm
Always passive wrote: Sun Sep 19, 2021 12:32 am So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
If I did consider active, I'd divide the investment between maybe five to ten active EM funds, definitely not just one.
Oh dear. This pays all the fees to achieve something that approximates the index.

Stick with one or two active funds, or just buy the index.

For those just ex-China, there is EMXC. If you want just some of K-TIMBRS (this is BRIC [without China], Taiwan, S. Korea, Mexico, and South Africa), there are slightly cheaper options. Active funds are not required to obtain positions in selected countries.
The purpose of active would be to eek out .1 or .2% annually above the increased expenses while minimizing the additional (vs. an index) downside risk. I don't see that one or two active funds accomplishes that as well as five or six. At some point - before you hit dozens of funds at least - probably the downside risk has been sufficiently minimized (along of course with the "risk" of outside gains.) It's true that you probably get closer to an index the more funds you buy, so that's another reason not to buy every available fund.

You're wanting the fund managers to pick those countries for you, not just pick specific equities. Again, that's if you want active management.
That assumes that the active managers' returns are independent and will be above the index on average even after fees. One's positive results often correlates with one's negative results (unless they are more or less following the same strategy, but then the diversification is not really there).

After two or three funds, how can the strategies really differ without it opposing the others? One can just form an index of the countries they buy since they are going to conflict on the holdings within the countries?
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by tibbitts »

secondopinion wrote: Mon Sep 20, 2021 3:44 pm
tibbitts wrote: Mon Sep 20, 2021 3:16 pm
secondopinion wrote: Mon Sep 20, 2021 2:20 pm
tibbitts wrote: Sun Sep 19, 2021 6:42 pm
Always passive wrote: Sun Sep 19, 2021 12:32 am So, my question, for those that share my view, is it time to consider active management, meaning an active fund?
If I did consider active, I'd divide the investment between maybe five to ten active EM funds, definitely not just one.
Oh dear. This pays all the fees to achieve something that approximates the index.

Stick with one or two active funds, or just buy the index.

For those just ex-China, there is EMXC. If you want just some of K-TIMBRS (this is BRIC [without China], Taiwan, S. Korea, Mexico, and South Africa), there are slightly cheaper options. Active funds are not required to obtain positions in selected countries.
The purpose of active would be to eek out .1 or .2% annually above the increased expenses while minimizing the additional (vs. an index) downside risk. I don't see that one or two active funds accomplishes that as well as five or six. At some point - before you hit dozens of funds at least - probably the downside risk has been sufficiently minimized (along of course with the "risk" of outside gains.) It's true that you probably get closer to an index the more funds you buy, so that's another reason not to buy every available fund.

You're wanting the fund managers to pick those countries for you, not just pick specific equities. Again, that's if you want active management.
That assumes that the active managers' returns are independent and will be above the index on average even after fees. One's positive results often correlates with one's negative results (unless they are more or less following the same strategy, but then the diversification is not really there).

After two or three funds, how can the strategies really differ without it opposing the others? One can just form an index of the countries they buy since they are going to conflict on the holdings within the countries?
The theory would be that if five independent fund managers with different research teams reach the same conclusion on a region, equity, etc. then that conclusion might be "better" than a conclusion reached by one or two. So again you're doing a lot of thrashing about hoping all that effort will be more likely add up to gaining rather than losing .1% or .2%. Ultimately it comes down to being a hobby activity.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by BJJ_GUY »

tibbitts wrote: Mon Sep 20, 2021 5:49 pm
The theory would be that if five independent fund managers with different research teams reach the same conclusion on a region, equity, etc. then that conclusion might be "better" than a conclusion reached by one or two. So again you're doing a lot of thrashing about hoping all that effort will be more likely add up to gaining rather than losing .1% or .2%. Ultimately it comes down to being a hobby activity.
Notably, this precise point is one of the many flaws with the SPIVA (and other) research pieces that use single factor analysis to determine active vs. passive debates.

If you have 4 active EM funds in your portfolio, it's very much possible for the majority of the funds to underperform the broad EM Index in more than 50% of the years, but not result in actual underperformance. However, according to how SPIVA interprets this scenario, active was a terrible choice compared to a passive index fund. But that isn't exactly how the math works, and especially not when you consider rebalancing etc., which makes this exercise even less straight forward. It's still very much possible, and not uncommon, for the aggregate result to outperform the index even If the underlying funds have lower than a 50% batting average against the passive bogey.

I am not saying this is always true, or even the majority of actual retail investor experiences. I'm only pointing out that SPIVA (and the like) should be used more cautiously to extrapolate what that information really means.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by secondopinion »

BJJ_GUY wrote: Tue Sep 21, 2021 11:56 am
tibbitts wrote: Mon Sep 20, 2021 5:49 pm
The theory would be that if five independent fund managers with different research teams reach the same conclusion on a region, equity, etc. then that conclusion might be "better" than a conclusion reached by one or two. So again you're doing a lot of thrashing about hoping all that effort will be more likely add up to gaining rather than losing .1% or .2%. Ultimately it comes down to being a hobby activity.
Notably, this precise point is one of the many flaws with the SPIVA (and other) research pieces that use single factor analysis to determine active vs. passive debates.

If you have 4 active EM funds in your portfolio, it's very much possible for the majority of the funds to underperform the broad EM Index in more than 50% of the years, but not result in actual underperformance. However, according to how SPIVA interprets this scenario, active was a terrible choice compared to a passive index fund. But that isn't exactly how the math works, and especially not when you consider rebalancing etc., which makes this exercise even less straight forward. It's still very much possible, and not uncommon, for the aggregate result to outperform the index even If the underlying funds have lower than a 50% batting average against the passive bogey.

I am not saying this is always true, or even the majority of actual retail investor experiences. I'm only pointing out that SPIVA (and the like) should be used more cautiously to extrapolate what that information really means.
That is part of my point. The assumption that active funds will outperform after fees is hard enough to be true; one can assume that all the funds have a .1% to .2% positive return over time after fees, but that can easily be false.

At least the mentioned passive "thrashing" has the advantage that most of the fees are removed. If missing .2% is the net result of not doing the active, then that is my loss; but their fees often shove a far larger loss than this if they are underperforming (which is not hard). After fees, where has there be long-term outperformance of funds, let alone multiple funds? Let alone knowing which ones will do so?
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by BJJ_GUY »

secondopinion wrote: Tue Sep 21, 2021 1:29 pm
BJJ_GUY wrote: Tue Sep 21, 2021 11:56 am
tibbitts wrote: Mon Sep 20, 2021 5:49 pm
The theory would be that if five independent fund managers with different research teams reach the same conclusion on a region, equity, etc. then that conclusion might be "better" than a conclusion reached by one or two. So again you're doing a lot of thrashing about hoping all that effort will be more likely add up to gaining rather than losing .1% or .2%. Ultimately it comes down to being a hobby activity.
Notably, this precise point is one of the many flaws with the SPIVA (and other) research pieces that use single factor analysis to determine active vs. passive debates.

If you have 4 active EM funds in your portfolio, it's very much possible for the majority of the funds to underperform the broad EM Index in more than 50% of the years, but not result in actual underperformance. However, according to how SPIVA interprets this scenario, active was a terrible choice compared to a passive index fund. But that isn't exactly how the math works, and especially not when you consider rebalancing etc., which makes this exercise even less straight forward. It's still very much possible, and not uncommon, for the aggregate result to outperform the index even If the underlying funds have lower than a 50% batting average against the passive bogey.

I am not saying this is always true, or even the majority of actual retail investor experiences. I'm only pointing out that SPIVA (and the like) should be used more cautiously to extrapolate what that information really means.
That is part of my point. The assumption that active funds will outperform after fees is hard enough to be true; one can assume that all the funds have a .1% to .2% positive return over time after fees, but that can easily be false.

At least the mentioned passive "thrashing" has the advantage that most of the fees are removed. If missing .2% is the net result of not doing the active, then that is my loss; but their fees often shove a far larger loss than this if they are underperforming (which is not hard). After fees, where has there be long-term outperformance of funds, let alone multiple funds? Let alone knowing which ones will do so?
The vast majority of the top quartile endowments, foundations, Canadian pensions etc., so basically the top tier institutional allocators have largely had pretty substantial out-performance from their equity portfolios (including each of the sub-segments, including the EM equity allocation). Unfortunately, most of the managers with whom they invest are not accessible to us retail investors. But the ability to invest with specialist managers who are very disciplined about their asset size, and who can invest in stocks largely outside of the MSCI EM index are all large drivers of long-term success (among several other variables that help align interests better than mutual funds etc.).

This is, unfortunately, the same issue we've run into in this group when discussing how we can invest in 'alternative assets/strategies' where we can benefit from higher absolute returns (particularly on an ex ante basis considering stock and bond valuations of today) and/or ways to improve diversification effects -- all of that to say, a better risk-adjusted return on a forward-looking basis, but without sacrificing the return target of the total portfolio. There are not really many great options available to retail investors.
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Correction

Post by Taylor Larimore »

BJJ_GUY wrote:
The vast majority of the top quartile endowments, foundations, Canadian pensions etc., so basically the top tier institutional allocators have largely had pretty substantial out-performance from their equity portfolios (including each of the sub-segments, including the EM equity allocation).
BJJ-GUY:

I'm not sure this statement is true. Do you have reliable evidence?

The link below reports: "Education Endowments returned 1.8% in fiscal year 2020". The Vanguard Total Market Index Fund returned 20.9% in 2020.

[url=https://www.pionline.com/endowments-and ... eturn-2020. [/url]

Best wishes.
Taylor
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Re: Correction

Post by BJJ_GUY »

Taylor Larimore wrote: Tue Sep 21, 2021 6:55 pm BJJ_GUY wrote:
The vast majority of the top quartile endowments, foundations, Canadian pensions etc., so basically the top tier institutional allocators have largely had pretty substantial out-performance from their equity portfolios (including each of the sub-segments, including the EM equity allocation).
BJJ-GUY:

I'm not sure this statement is true. Do you have reliable evidence?

The link below reports: "Education Endowments returned 1.8% in fiscal year 2020". The Vanguard Total Market Index Fund returned 20.9% in 2020.

[url=https://www.pionline.com/endowments-and ... eturn-2020. [/url]

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: “The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.”
The equity index isn't a great benchmark for a well diversified portfolio like the institutional ones we're referring to. That being said, your numbers aren't apples-to-apples.

Fiscal year 2020: MSCI ACW Index +2.1%.

NACUBO data gives composite figures. The vast majority of the institutions reporting to the database you are citing are not at all what I would define as top-tier, and certainly not sophisticated.

The reason I make that specific delineation isn't just because it's convenient to make a point. The percentage of endowments that have an autonomous, well-staffed internal investment office is quite small. Most of the endowments (and same goes for foundations, and pensions for that matter) utilize consulting firms, and do not operate - nor invest - the same way the best groups do. Point being, if you don't distinguish in this way, you end up with a bunch of endowments who are investing primarily via the same ETFs and mutual funds available to us.

There is a large degree of variation in performance across the universe of institutions that report to NACUBO. Interestingly, over longer time periods (i.e., at least 10 years, but especially when you go to 20 year trailing periods), the top decile endowment funds are pretty consistently in the top group. Unlike so much else in investment universes, the variability of which constituents make up the top quartile doesn't change much.

A shorter way to answer your question would be to say no, I don't have great aggregate data for you. But you can look at annual reports for Yale (or pretty much all the Ivy League endowments), Virginia, Notre Dame, Stanford, Texas, MIT, Duke etc., to see that they have results that support what I have stated above.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by tibbitts »

secondopinion wrote: Tue Sep 21, 2021 1:29 pm That is part of my point. The assumption that active funds will outperform after fees is hard enough to be true; one can assume that all the funds have a .1% to .2% positive return over time after fees, but that can easily be false.

At least the mentioned passive "thrashing" has the advantage that most of the fees are removed. If missing .2% is the net result of not doing the active, then that is my loss; but their fees often shove a far larger loss than this if they are underperforming (which is not hard). After fees, where has there be long-term outperformance of funds, let alone multiple funds? Let alone knowing which ones will do so?
You seem to be mistaking my argument as concluding that active is necessarily or even likely better, but "all the [active] funds" don't have to have a positive return as you stated. You invest in a bunch; hoping that on balance the good returns outweigh the bad. EM is a high bar here because of the relative expenses for active vs. passive - much higher than the relative difference in most domestic categories. Naturally one of your screens for active selection would eliminate most of the higher-cost active funds. My main point is that I believe the risk of investing in only one or two active funds, assuming they're not closet index funds, is too great.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Always passive »

tibbitts wrote: Tue Sep 21, 2021 8:07 pm
secondopinion wrote: Tue Sep 21, 2021 1:29 pm That is part of my point. The assumption that active funds will outperform after fees is hard enough to be true; one can assume that all the funds have a .1% to .2% positive return over time after fees, but that can easily be false.

At least the mentioned passive "thrashing" has the advantage that most of the fees are removed. If missing .2% is the net result of not doing the active, then that is my loss; but their fees often shove a far larger loss than this if they are underperforming (which is not hard). After fees, where has there be long-term outperformance of funds, let alone multiple funds? Let alone knowing which ones will do so?
You seem to be mistaking my argument as concluding that active is necessarily or even likely better, but "all the [active] funds" don't have to have a positive return as you stated. You invest in a bunch; hoping that on balance the good returns outweigh the bad. EM is a high bar here because of the relative expenses for active vs. passive - much higher than the relative difference in most domestic categories. Naturally one of your screens for active selection would eliminate most of the higher-cost active funds. My main point is that I believe the risk of investing in only one or two active funds, assuming they're not closet index funds, is too great.

Can you explain your comments relative to CEFs…

“My main point is that I believe the risk of investing in only one or two active funds, assuming they're not closet index funds, is too great.”
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by BJJ_GUY »

Always passive wrote: Wed Sep 22, 2021 1:49 am Can you explain your comments relative to CEFs…

“My main point is that I believe the risk of investing in only one or two active funds, assuming they're not closet index funds, is too great.”
Are you asking how closed-end funds change this discussion? Or how CEFs might alter the statement (that you've quoted above)? I'm not following, so curious about the point you were making/questioning
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Always passive »

BJJ_GUY wrote: Wed Sep 22, 2021 4:13 am
Always passive wrote: Wed Sep 22, 2021 1:49 am Can you explain your comments relative to CEFs…

“My main point is that I believe the risk of investing in only one or two active funds, assuming they're not closet index funds, is too great.”
Are you asking how closed-end funds change this discussion? Or how CEFs might alter the statement (that you've quoted above)? I'm not following, so curious about the point you were making/questioning
I understand and have invested in them but do not understand why you refer to them in your statement. A naive question
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by Northern Flicker »

Always passive wrote: Sun Sep 19, 2021 3:38 am
redbarn wrote: Sun Sep 19, 2021 1:23 am According to the SPIVA scorecards, the percent of US-based active emerging market funds that underperform the emerging market index benchmark in the long run (20 years) is over 92%. The case for indexing is no weaker than for US or developed international stocks.
That is a certainly a fact. But now I think that we should assume the China is reversing and I doubt you can consider it any longer an efficient market. Passive does not do well in these markets.
I don't think it is less efficient than it was a year ago or 5 years ago.
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by nisiprius »

Let's look at the situation over the last few weeks, from the point of view of "how much difference could it have made, in a Boglehead-style portfolio? Suppose that instead of an index fund, you had held a fund that had successfully anticipated the problems in Evergrande or in China generally, and actively dumped Chinese stocks in time?"

Executive summary: whatever your geopolitical and macroeconomic ideas about China, it wouldn't actually have made much difference, over the last few weeks, whether you held Chinese stocks or not.

Since this is a question about international stocks, to make the difference as big as possible we will assume that the investor is using the Vanguard Total World Stock Index ETF, VT, which is 42% ex-US. It would be less for someone holding international at below global cap weight.

For Chinese stocks in general, the iShares MSCI China ETF, MCHI.
And for some other comparisons, the Vanguard Emerging Markets Stock Index ETF, VWO, and
the Vanguard Total [US] Stock Market Index Fund, VTI.

Image

From 9/9/2021 through 9/20/2021

VT (total global) fell -3.91%.
MCHI (China) -10.44%.
VWO (emerging markets) -5.98%.
VTI (US) -3.53%.

Chinese stocks are 3.8% of VT.

Therefore, we can calculate* that if "active-VT" had actively managed to dump Chinese stocks in August,

instead of falling -3.91%,
"active-VT" would have fallen -3.65%
"active-VT" would have fallen 93% as far as VT

Since the question involves emerging markets funds specifically, we can also look at VWO.
Chinese stocks are 36.8% of VWO.

VWO fell -5.98%.

If "active-VWO" had actively managed and had managed to dump Chinese stocks in August,

instead of falling -5.98%,
active-VWO would have fallen (-5.98% + (36.8% of 10.44%))/63.2% = -3.38%
active-VWO would have fallen 57% as far as VWO, so, yes, a considerable benefit.


And of course, most interesting for international skeptics,
VTI fell -3.53%, so even without any international stocks at all,
VTI fell 97% as far as our imaginary China-dodging "active-VT."
And 90% as far as VT with China.

What's the bottom line? Focusing on the successes and failures you could get, from successful judgement calls in slivers of the market (and, yes, China is a sliver of the holdings of a total global stock fund like VT) makes it easy to ignore how small those slivers are and what a small difference they make in the total market.

*96.2% of X + 3.8% of -10.44% = -3.91%
96.2% of X + 0.40% = -3.91%
X = (-3.91% + 0.4%)/96.2% = -3.65%
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by mmcmonster »

whereskyle wrote: Sun Sep 19, 2021 5:52 pmhttps://www.spglobal.com/spdji/en/resea ... hts/spiva/

For Brazil and India, indices have outperformed more than 80% of mutual funds over the past 5 years.

So, I would say, absolutely not.
I seem to recall either an interview on the Bogleheads on Investing podcast or similar stating that China is a special case.

Because the mentality of the general populace is that stock investing is like gambling and that a lot of individual investors there do a lot of trading (not buying and holding), it's the one market where the index can still be reliably beaten by actively managed funds.

(Wish I could remember where I heard/read this. :-/)
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Re: For those that invest in Emerging Markets - Go ACTIVE?

Post by asif408 »

mmcmonster wrote: Wed Sep 22, 2021 7:20 am
whereskyle wrote: Sun Sep 19, 2021 5:52 pmhttps://www.spglobal.com/spdji/en/resea ... hts/spiva/

For Brazil and India, indices have outperformed more than 80% of mutual funds over the past 5 years.

So, I would say, absolutely not.
I seem to recall either an interview on the Bogleheads on Investing podcast or similar stating that China is a special case.

Because the mentality of the general populace is that stock investing is like gambling and that a lot of individual investors there do a lot of trading (not buying and holding), it's the one market where the index can still be reliably beaten by actively managed funds.

(Wish I could remember where I heard/read this. :-/)
Think that was Jason Hsu on Morningstar podcast: https://www.morningstar.com/podcasts/the-long-view/106
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