Emerging Markets

For institutional investors

Parametric’s Emerging Markets strategy positions portfolios to capture the long-term growth potential in emerging markets with less volatility than indexes typically exhibit.

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Traditionally, emerging market indexes tend to have concentrated country allocation, with 75% of holdings in just five countries. Parametric’s strategy avoids the concentrated security- and country-level exposures inherent in other emerging market strategies using our equal-weight methodology. We seek to outperform the MSCI Emerging Markets Index by 2% to 3% over a full market cycle.

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Parametric’s strategy relies on a rules-based approach, in combination with a systematic rebalancing discipline, to reduce concentrations and emphasize broad diversification in seeking its objective of capital appreciation. Relying on the asset class experiencing frequent large drawdowns is central to our approach. During these periods of market weakness, a diversified portfolio typically outperforms a more concentrated one. By preserving capital during down markets, the diversified portfolio then has a leg up for whenever the market does return to growth.

How it works

Country selection
Sector selection
Security selection
Rebalancing

The country selection process is driven by a tiered approach in which countries are equally weighted within four tiers based on market capitalization and liquidity. As a result, we underweight bigger countries and overweight smaller ones. Countries that are unable to maintain a Tier 4 weight we consider to be transition countries.

Once country exposure is determined, we set sector-level target weights in each country in an attempt to move closer to an equal representation from each economic sector while taking into account practical liquidity considerations.

Security weights are based on market capitalization within their country-sector combination but are largely viewed as exposure units used to fill each country-sector weight.

Systematic rebalancing brings countries back to target weights while balancing practical considerations like transaction costs. Rebalancing is usually prompted by a country’s overweight in the portfolio.

Country selection

Intended benefits of Emerging Markets

Equal-weight methodology

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Our modified equal-weight methodology aims to reduce imbalances. Incorporating an underweight to the largest markets and an overweight to smaller emerging-market countries can reduce volatility and increase potential returns.

Top-down approach

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Our approach follows a rules-based process that produces transparent outcomes. We aim to capture the long-term growth potential of emerging markets by avoiding the risk inherent to active management and concentration risks of mainstream indexes.

Disciplined rebalancing

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Disciplined rebalancing to predefined target weights results in a “buy-low/sell-high” orientation that can enhance returns and minimize trading costs.

Why choose Parametric?

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