Parametric’s Emerging Markets Strategy is a broadly-diversified equity strategy designed to efficiently capture the compelling long-term returns of developing countries’ equity markets. Since 1994, this strategy has maintained a consistent structure built to fit the unique characteristics of emerging equity markets. Hallmarks of this investment approach include:
Broad diversification
Parametric maintains long-term exposure to a broad list of countries. By doing so, we avoid the risks of active country selection and ensure the strategy benefits from the unique volatility and correlation aspects of these markets. With any multi-country portfolio, country selection and weighting have the largest effect on the risk and return experience.
Emphasize smaller countries
Parametric’s maintains a country weighting process to systematically overweight smaller market cap countries relative to the standard emerging ones. There are both risk (concentration of cap-weighted indexes and low correlations of smaller countries) and return (lower valuations and higher growth rates) rationales for this emphasis. We invest in approximately 44 countries among four tiers based primarily upon capitalization size and liquidity − though this process can be modified due to specific country issues. Target weights for the countries are equal within each tier. Employing this structure allows us to capture the potential of the asset class (and particularly the smaller markets) in a diversified manner.
Disciplined rebalancing
Markets will, over time, move the portfolio away from its targeted positioning. If left unattended, assets will concentrate in the best performing markets, leaving the investor overweighted in areas of recent strength. Our rebalancing efforts are primarily aimed at avoiding this concentration. What’s more, our research has shown a disciplined strategy of reducing allocations after periods of substantial appreciation has both a return-enhancing and risk-reducing effect. An approach that involves rebalancing to fixed country weights can turn volatility into an ally in the hunt for superior risk-adjusted returns. These markets’ unique combination of volatility and correlation creates a compelling case for disciplined rebalancing.
Emerging Markets Core Strategy
As a follow-on to our EM strategy, Parametric has created EM Core, using an investment process identical to EM while excluding most "frontier" emerging countries. Frontier countries are those which represent the smallest weight in the MSCI Index based upon criteria including liquidity and market size. Parametric’s motivation for creating the EM Core strategy include:
- Client/Prospect Feedback − A set of investors have expressed discomfort with the more exotic and relatively more illiquid frontier countries and would prefer to exclude them from their portfolio of investments.
- Lower Cost − Frontier markers are the most costly to manage and transact. EM Core can be implemented at a lower cost to investors.
- Lower Tracking Error − EM Core offers the potential for lower tracking error or relative risk vs. standard benchmarks.
