It's much cheaper for quant firms to launch emerging markets strategies because traditional firms need to employ large teams of analysts. "If you're going to be implementing a new emerging markets strategy, if you don't have the analysts in place, it's easier to do with a quant strategy," said John Wasnock, director of manager research at Wurts & Associates, Seattle, an investment management consulting firm.
However, Scott Whalen, a senior consultant in Wurts' Los Angeles office, questioned whether emerging market stocks will continue at their fevered pace.
"The frightening part is that returns have been driven by surging commodities prices," he said. "My question is, ‘Is this a short-lived thing or are emerging markets coming into their own?'"
That unknown aside, some experts said the importance of stock picking in generating alpha from developing markets has soared.
"It used to be a country selection game completely — call it 10 years ago — and now we're seeing a significant shift toward stock selection," said Churchill Franklin, executive vice president at Acadian Asset Management Inc., a Boston-based quant shop.
Acadian closed its emerging market stock strategy to new business at $5 billion at year-end 2004, just 16 months after it had been launched. The firm uses both active stock and country selection.
Money managers said the quality of data for emerging markets companies has improved dramatically in recent years.
Five years ago, only about 30% of Eastern European companies met international or U.S. accounting standards. Now, about 75% do, said Thomas Mead, managing director of the Barr Rosenberg Research Center at AXA Rosenberg. Mr. Mead said the firm has been investing in Asian stocks for some time, but a move into South American and Eastern European stocks is new.
Mr. Mead said data available from vendors has improved. "We're able to get the detail in emerging markets from about 4,000 companies," he said. "We need excruciating detail from the companies we invest in."