In an August 19, 2014 article on the CBS MoneyWatch website, author Larry Swedroe tackles the question of whether active management can generate superior results to index or asset class-oriented strategies in less developed market segments, like emerging markets stocks.
One argument often made by advocates of active management – or stock-picking – is that while indexing, or passive investing, is the winning strategy in “efficient” markets – such as those for large-cap stocks in developed countries – active management is the winning strategy in “inefficient markets”. And emerging markets are generally considered the best example of inefficient markets.
The author compares the performance of actively-managed emerging markets funds managed by Mark Mobius – chairman of Templeton’s Emerging Market’s group, and widely regarded as one of the most accomplished investment managers of the past thirty-plus years – with index funds from Vanguard and Dimensional Funds.
Using data from Morningstar, the author shows that Templeton’s actively-managed fund TEDMX underperformed both Vanguard’s VEIEX and DFA’s DFEMX for five-, ten- and fifteen-year periods ending August 18, 2014.
There is more evidence of underperformance by active management in emerging markets in Standard & Poor’s new European Active Versus Passive Scorecard (pdf). The results for emerging market funds upend the myth that active management is successful in these “less efficient” markets. For example, 71 percent, 84 percent and 88 percent of actively-managed funds underperformed their benchmarks over the one-year, three-year and five-year periods studied, respectively. The average actively managed fund’s underperformance was -0.4 percent per year, -1.8 percent per year and -3.5 percent per year over the one-year, three-year and five-year periods, respectively.
In short, seeking outperformance through active management is just as much a fool’s errand in emerging markets as it is in developed markets. It’s a game that may be possible to win, but the odds of doing so are so small that it’s more prudent to not even try.
You can read the entire MoneyWatch article here.