Emerging markets are held up as the poster children for inefficiency and, it follows, as the perfect region for active managers to outperform benchmarks.
But despite heightened volatility, uncertainty and wide return dispersion — thanks in part to the so-called taper tantrum as a result of comments in May by then-chairman of the U.S. Federal Reserve, Ben Bernanke — the majority of money managers failed to outperform their benchmarks.
The J.P. Morgan Emerging Market Bond Global Diversified index lost 6.58% in 2013, compared with a gain of 18.53% in 2012. It was a similar story for equities, with the MSCI Emerging Markets index returning -2.25% in 2013, compared with 18.7% in 2012. It's better this year, as year to date through June 30, the J.P. Morgan Emerging Market Bond Global Diversified index returned 8.66%, while the MSCI Emerging Markets index has returned to positive performance, gaining 6.32%.
According to the inaugural S&P Indices Versus Active Funds Europe Scorecard — a measure of the performance of actively managed European equity funds, denominated in euros and British pounds, against their respective benchmark indexes — the negative returns for passive investments were evident also in actively managed strategies.
For euro-denominated emerging markets equities, 70.52% of strategies underperformed the S&P/IFCI composite benchmark for one year, 83.57% over three years and 87.65% over five years for periods ended Dec. 31. The S&P/IFCI composite is made up of the S&P Emerging Broad Market index, plus South Korea.
It was a similar, although slightly better, story for British pound-denominated strategies, with 60.8% underperforming for one year, 59.04% underperforming over three years and 62.5% failing to top the benchmark over five years.