Investing in emerging-market small-cap stocks paid off in a big way for Dimensional Fund Advisors LP this year.
Dimensional’s $4.7 billion Emerging Markets Small Cap Portfolio produced the highest risk-adjusted return of 197 similar funds in the first half, according to the Bloomberg riskless Return Ranking, by spreading cash across more than 3,000 stocks of small businesses in 17 countries from India to Brazil, while skirting Russia.
The fund, managed by Karen Umland and Joseph Chi, gained 1.2 percent when adjusting for price swings, double the return of the MSCI Emerging Markets Index.
Umland and Chi shun stock picking and invest based on research from Dimensional board members Kenneth French and Nobel laureate Eugene Fama, 75, whose model argues that small-cap stocks, often defined as companies with a market value of $250 million to $2 billion, beat broader markets on a regular basis.
The fund, which has 11 percent of assets allocated to Indian stocks, was bolstered by the 56 percent rally in that country’s small caps leading up to Prime Minister Narendra Modi’s May electoral win.
“The past six months has been a good period for small-cap stocks in emerging markets,” Umland said by phone from Santa Monica, Calif. “Small caps in India, for example, have had a very strong period and we have a slight overweight in India compared to most benchmarks based on our methodology.”
Risk Control
Her fund produced a total return of 11 percent in the first six months, seventh-best in the ranking, and had the seventh- lowest volatility, at 8.8. Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns aren’t annualized.
In second place was the Franklin Templeton Emerging Markets Smaller Companies Fund, which returned 1.16 percent after accounting for price swings and 9.8 percent before. The ranking included funds with at least $250 million in assets and excluded those that focus on specific regions.
The two funds were among the 10 least volatile in the ranking. Price swings in Dimensional’s fund were below those of the MSCI Emerging Markets Index, which had a volatility of 11 in the six months.