The “Wrong” Reason
There are also signs that many active emerging market managers, who would have had more diverse investments than ETF funds, are sticking more closely to the benchmark.
Data from Copley Fund Research shows the average active share of global emerging market funds—the extent to which their holdings differ from the index—has fallen to 74.7 percent from a peak of 78 percent in April 2016.
Partly this is due to the addition in May 2016 of U.S.-listed Chinese firms to the emerging benchmark because active investors held these stocks before their inclusion in the index. But competition from ETFs may also play a role.
"The effect of rising ETF flows and narrowing breadth has been to push active investors to get closer to their benchmarks," said Edward Cole, a portfolio manager at GLG Man Group.
Even among active managers, many may be holding tech stocks for the "wrong" reason—namely, the fear of underperforming the index, said Kiran Nandra-Koehrer, senior product specialist in Pictet Asset Management's emerging equities team.
While many investors are wary of paying higher fees for funds to replicate the index, active managers don't want to risk missing out on meaty returns from tech. A streak of losses and fund closures remains fresh in their mind, with 746 emerging market funds liquidated in the last five years, according to Lipper data.
But Psigma's McPherson cited one of his holdings, Mirabaud's Emerging Markets fund, which has returned over 33 percent this year, outgunning the MSCI index's 29 percent. That shows an active manager can overcome concentration risks.
"We would rather our active managers weight to the small tech companies that are better value," McPherson said.
This article was provided by Reuters.