Is There Any Alpha in Institutional Emerging Market Equity Funds?

Abstract

Can active fund managers outperform the passive index in global emerging-markets equity arena? To answer this question, this paper delineates emerging market fund strategies and applies the multifactor and conditional CAPM approaches to a unique data set consisting of institutional emerging market managers returns from Russell Investments. This analysis results in five major findings: (1) varieties of products have proliferated in this asset class; (2) active management works in this asset class, but investors have relied more on research to hire the good ones; (3) value managers tend to have higher alphas, but the supply of value managers is less than that of growth or market-oriented managers; (4) key risk drivers are price momentum, valuation, Asia, and resources sector; (5) active risks from this asset class are still present, so it’s important to diversify across multiple strategies and styles to mitigate unwanted risks. In sum, alphas are obtainable, but they are not free.

Keywords: Active management, alpha, investment styles, risk adjusted returns, emerging market equity, emerging market fund managers, price momentum, small-cap effects

JEL Classification: G20, G23, G11