Most global equity strategies available to South African investors often have a bias toward developed market (DM) stocks thus ignoring the emerging market (EM) universe. While higher risk is often cited as the key reason for the omission of EM stocks, little is said about the diversification benefits and growth potential that investors can get from having such exposure.
Our Old Mutual Global Managed Alpha Equity Strategy (GMA), launched in 2017, showcases why investors should consider EM exposure in global investments. The strategy uses a systematic model which allows for a widened opportunity set – adopting the MSCI All Country World Index (ACWI) as our benchmark instead of the MSCI World Index. This is one of the fund’s key differentiators from other global funds.
In this note, we will unpack the ACWI universe, then consider EM performance versus DM and elaborate on whether this expanded universe has been beneficial to our investors. Lastly, we will recap our dynamic factor process and illustrate this via one of our EM holdings, JD.Com (China’s ‘Amazon’ equivalent).
Emerging Markets Performance
Since the launch of GMA, the dispersion has been pronounced, with DM outperforming EM by around 70%. Although the spread has been significant from 2017 to 2024, when assessing performance over a 20-year period (Chart 2) EM has not always been undesirable, having historically enjoyed long periods of outperformance.
Old Mutual Global Managed Alpha Equity Strategy’s performance
Despite the tough EM environment, the model has successfully identified EM counters that exhibited the relevant factor drivers. In Chart 3 we have split the excess return that the fund achieved since inception into stocks from the DM and EM universe respectively.
Emerging market risk management
Although we have access to EM stocks, the fund is positioned as a core equity building block and therefore adheres to stringent tilt limitations versus its benchmark – a maximum of 1.5% over- or underweight per individual stock and a maximum of 3% over- or underweight per country and sector.
Potential double whammy
From the data above, it is evident that an expanded universe, covering both DM and EM, can be a real benefit to a systematic model – even in a tough environment. Importantly, GMA’s performance has shown that it is not reliant on a recovery in EM. However, it is worth noting that if EM does reverse the current trend and stage a recovery off a low relative base, this could be an additional tailwind for a fund that uses the ACWI.
Our model is a glass box, not black box | JD.Com
The proprietary systematic model used for this fund evaluates six broad market drivers or factor buckets: value, growth, quality, momentum, size and volatility (risk). This process is style agnostic, meaning that the approach will tilt toward or away from these factors depending on the forecasted return drivers.
The benefit of a glass box, a completely transparent model, is that one can look backwards and see exactly how each stock was scored and whether this resulted in the correct positioning. To illustrate this transparent approach, the fund’s holding in JD.Com is used below in Chart 4. The black line is the cumulative score attributed to the counter, which shows that it scored very well during 2020; this means that the company exhibited the factors that the model forecast would drive the market – or vice versa. The dark blue line shows that an overweight to the stock added excess return versus the benchmark from 2020 through mid-2022; however, by this stage, the score had deteriorated, and the fund sold out.
As noted above, this is done within the tight risk parameters integrated into the portfolio construction process. Risk management is a deliberate part of the approach as the objective is to provide an outcome that produces incremental excess returns without taking on undue risk relative to the benchmark.
In conclusion, we are excited to announce that in addition to our Section 65 approved UCITS Fund, we launched a ZAR-based unit trust earlier this year, called the Old Mutual Global Managed Alpha Equity Feeder Fund.