When Robert Marshall-Lee started running an emerging-market equity fund six years ago, he decided the only way to withstand the surge in passive investing strategies was to stop paying attention to them.
Breaking ranks with peers whose goal was to beat the benchmark, the Bank of New York Mellon Corp. money manager instead identified about 50 companies he thought were well run and worth holding long term -- and it paid off. He delivered 12 percent annual returns in the past five years, eclipsing all competitors, human and robot, tracked by research provider Morningstar Inc.
“Competition from exchange-traded funds doesn’t even feature for me, I am very unconcerned,” said Marshall-Lee, a 22-year investment veteran whose top-performing Newton Global Emerging Fund is among the 2.6 billion-pound ($3.3 billion) portfolio he lead manages from London. “If you track the index you end up holding a lot of undesirable companies.”
In contrast to the trend in advanced countries, Marshall-Lee represents the rule rather than the exception in developing nations. Since 2012, active investors like him with funds domiciled in Europe have done better than exchange-traded funds 60 percent of the time in these markets, compared with just 20 percent in the U.S., according to Morningstar.
That defies the view held by an increasing number of market savants and participants, such as Warren Buffett, that index trackers will always win over time for the simple fact that they cost less. But then, picking stocks on the Standard & Poor’s 500 is an entirely different animal from navigating more than two dozen emerging equity markets in countries where data can be scarce and political upheaval often takes investors unaware. Some emerging-market stocks don’t even trade every day.
Dominant Stocks
There’s also the glaring detail that index funds in emerging markets almost always end up being a proxy for what’s happening in Asia -- a skew that may become more pronounced when Chinese domestic A shares are added to the benchmark MSCI Emerging Markets Index next year.
Marshall-Lee, whose fund has registered inflows in the past five years as some competitors bled assets, is free to be more nimble. He takes big bets on a few companies, with his biggest holdings including African media giant Naspers Ltd., Hong Kong insurer AIA Group Ltd., Taiwan Semiconductor Manufacturing and Indiabulls Housing Finance. He also stays away from the behemoth state-owned companies.
Tracking indexes, by contrast, often leaves investors vulnerable to the performance of the handful of dominant stocks: Samsung Electronics Co. makes up 22 percent of the Korean market, Brazil’s two biggest banks account for a fifth of the Ibovespa and just three companies represent 41 percent of Poland’s benchmark.
Good Managers