From Morningstar: 2024-09-19 04:37:00

Developing country markets offer opportunities for stock-pickers to find hidden gems not yet included in benchmarks tracked by passive funds. However, recent data from Morningstar’s European Active/Passive Barometer shows that passive funds in emerging markets have outperformed active funds due to China’s performance and US rate cut expectations easing.

In the past, active managers in the global emerging market equity category easily beat passive alternatives by taking a cautious approach to China. However, the success rate for active managers has dipped to 40.2% in June 2024 compared to 46.3% in December 2023, with only Indian and Chinese equities showing success rates above 50%.

Investors have been pulling funds from actively managed emerging market equity funds, especially those exposed to China, with EUR 11.4 billion in outflows over the past year. In contrast, passive funds in the same category received EUR 4 billion in net inflows, reflecting a shift towards passive investing in the emerging markets.

Morningstar research shows that high costs are a key reason why passive funds tend to outperform their active counterparts in emerging markets. Active funds are typically five-six times more expensive than passive funds, with fees ranging from 1.8% versus 0.18-0.60%. Additionally, concerns over concentration in certain countries and political risks further raise concerns about passive fund inefficiencies.

Despite the belief that emerging markets inefficiencies should favor active managers, only 24% of active managers in the emerging market equity category have survived and outperformed passive peers over 15 years. While it may seem easy, identifying skilled active managers in this asset class requires careful due diligence. Recent positive performance trends have shown that active managers have been strategic in their country allocations, benefiting their returns.

In 2024, active managers in emerging markets have shown success through strategic country allocations, like being cautious on China and bullish on Brazil. While only 4 out of 740 best performing funds were passive, active managers were able to navigate the weak market environment successfully. This highlights the importance of active management during challenging market phases.



Read more at Morningstar: Should Investors Go Active for Emerging Markets?