Emerging Markets and Indexing

The division of foreign markets into developed and emerging segments dates back to 1981, when Antoine van Agtmael, an economist at the World Bank, referred to third-world countries as emerging markets. In a 2011 performance study, the Aperio Group looked at 10 years of return data (12/31/2000 to 12/31/2010) from all active emerging markets mutual funds. 

 

On a pretax basis, jut 28% of active mutual funds outperformed their respective benchmark (2/3 of the 28% beat their benchmark by ~ 1% per year). Emerging market hedge funds have done slightly better on a pretax basis, risk-adjusted basis. However, given the reality that hedge funds are generally very tax inefficient, the ever-so-slight benefit likely overstates what happens on an after-tax basis.

 

Of the 21 countries that comprise the MSCI Emerging Markets Index, two may be promoted to developed market status (Korea and Taiwan). These two countries represent significant market cap weightings in the emerging index. As of March 2012, the top five countries were: China (17% of the index), Brazil (15%), South Korea (15%), Taiwan (11%), and South Africa (8%). The top five countries in the EAFE Index were: U.K. (22%), Japan (21%), France (9%), Australia (8%), and Germany (8%).