Emerging markets have been looking more attractive as investors search for yield, making the risk/return trade-offs more palatable. Better economic outlooks for the cohort relative to developed countries, backed by improving fundamentals, have drawn investors, institutional or otherwise. Both active and passive funds have drawn capital at rates faster than their developed market counterparts.
Viable options: Return distributions have been historically wider for EM equity relative to DM stocks, but the gap is less pronounced in recent years.
Tactically active: Funds benchmarked to the MSCI EM index have grown faster than DM-focused funds. EM funds have grown at an average 22% in the past five years, compared to 15% for large-cap U.S. equity and 11.5% for EAFE funds.
What's the draw? Real GDP growth in EM countries (mostly China, India and South Korea) have led the cohort over developed markets since the financial crisis, with forward estimates projecting wider spreads.
Positive fundamentals: Year-over-year earnings growth gained some traction in recent years, surpassing U.S. large caps, but below EAFE stocks.
Monthly returns used for distribution numbers. Sources: eVestment LLC; Bloomberg LP; International Monetary Fund