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Before your investment’s travel: Vaccines and immunisations


Last week VanEck released a white-paper titled Factor-in Emerging Markets, which provided a health check on the different approaches that investors can take in emerging markets.

Tourists have long been attracted to emerging markets. The beautiful locations, the sense of adventure and, often, the ability to spend less for a premium experience. But before you go away, travellers always take vaccines for certain places because, in some of these exotic locations, danger lurks.

Investors have also long been attracted to emerging markets for their potential growth. Emerging markets have large, increasingly affluent, generally younger, populations. Emerging markets, too, have been at the forefront of innovation with some of the fastest-growing technology firms listing on emerging market exchanges.

That is why it is prudent to take the right approach. Last week VanEck released a white-paper Factor-in Emerging Markets, which provided a health check on the different approaches that investors can take in emerging markets.

The outcome of this health check suggests the best ‘immunisation’ for emerging markets investing is a multi-factor approach.

In summary, the paper compares active management and passive approaches including single-factor and various multiple-factor approaches. 

Investing in emerging markets is associated with being expensive because brokerage fees are higher and these markets require more specialist knowledge, so many investors have been happy to pay higher fees to have a professional investor select the best emerging market opportunities. This is active management. Sometimes the returns were good, but often they were not. According to the paper “based on historical performance, many active managers have underperformed.”

The paper cites that, the median active manager, according to Morningstar data, has underperformed MSCI EM in 10 out of 14 calendar years. Dispersion in active returns year on year is also significant with some managers underperforming by up to 20%.

It’s little wonder many people found this a poor bargain and moved to lower-cost passive funds that tracked traditional indices. In these new funds, returns could be considered average - not high, not low, just the market average.

But, when it comes to emerging market equity investing in a passive fund, the widely used benchmark is the MSCI Emerging Markets Index, for ease of reading let’s call it the MSCI EM Index. The MSCI EM Index includes almost 1,500 listed companies and there is no way all of these are attractive from an investment point of view. In addition, information is not as easily available or shared in emerging markets, and this inefficiency should create opportunities for investors to uncover attractive investment opportunities before these are reflected in market prices.

The VanEck paper assesses single-factor approaches that have been successful in developed markets, like the quality and value factors. The paper finds that in emerging markets, the efficacy of single-factor approaches in emerging markets is not as pronounced as they are in developed markets due to two key reasons:

  1. The many economic cycles within emerging markets countries. According to the paper, emerging markets countries’ stages in the economic cycle are out of step. It cites an example following COVID-19. India, for example, “delivered a consistent period of positive economic activity (as represented by PMI), excluding a few months. In contrast, economic activity surged in Taiwan, peaking in late 2020, and reverting to contractionary by 2022. On the other hand, developed markets experienced consistent phases of the economic cycle.”
  2. The return dispersion between countries. According to the paper, the wide dispersion of returns between countries within the index limits the efficacy of a single-factor approach. The paper uses the example of value, which had up to 37% active exposure to a single country. According to the paper, “This presents challenges because if a factor is overweight a country but performs poorly, while the macro environment may bode well for a factor – the active country exposure diminishes the efficacy.”

Innovations in index design for passive funds also go beyond single-factor approaches. So, the paper also considers MSCI’s multiple-factor approaches. In addition to VanEck’s analysis, the paper also cites MSCI research to determine the most appropriate mix of factors for investors.  -

MSCI found that a Diversified Multi-Factor, which targets four factors (value, low size, momentum, quality) was found to produce the most optimal metrics - the highest historical IR and Sharpe ratio.

The VanEck research found that this multi-factor approach overcomes the limitation of the single-factor approaches. It also found that over the long term investors that have utilised MSCI’s Diversified Multi Factor approach have outperformed. 

Taking a diversified approach across factors could be the ‘immunisation’ your investments need for emerging markets.

The VanEck MSCI Multifactor Emerging Markets Equity ETF (ASX: EMKT) tracks the MSCI Emerging Markets Multi-Factor Select Index (EMKT Index).

According to the white paper, EMKT’s multi-factor methodology “is an all-seasons approach that has historically outperformed the benchmark over the long term. The bottom-up approach and selection of four factors quality, value, momentum and low size were found to be the most optimal for maximizing Sharpe and information ratios.”

Key risks: An investment EMKT carries risks associated with: ASX trading time differences, emerging markets, financial markets generally, individual company management, industry sectors, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the PDS for details.

Published: 23 March 2024

Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

VanEck Investments Limited (ACN 146 596 116 AFSL 416755) (‘VanEck’) is the issuer and responsible entity of all VanEck exchange traded funds (Funds) listed on the ASX. This is general advice only and does not take into account any person’s financial objectives, situation or needs. The product disclosure statement (PDS) and the target market determination (TMD) for all Funds are available at You should consider whether or not an investment in any Fund is appropriate for you. Investments in a Fund involve risks associated with financial markets. These risks vary depending on a Fund’s investment objective. Refer to the applicable PDS and TMD for more details on risks. Investment returns and capital are not guaranteed.

EMKT is indexed to a MSCI index. EMKT is not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to EMKT or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and EMKT.