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.<\/p>\n
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.<\/p>\n
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<\/a> and Dimensional Funds<\/a>.<\/p>\n Using data from Morningstar, the author shows that Templeton’s actively-managed fund TEDMX<\/a> underperformed both Vanguard’s VEIEX<\/a> and DFA’s DFEMX<\/a> for five-, ten- and fifteen-year periods ending August 18, 2014.<\/p>\n There is more evidence of underperformance by active management in emerging markets in Standard & Poor’s new European Active Versus Passive Scorecard<\/a> (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.<\/p>\n 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.<\/p>\n