The median return in the IM Emerging Markets Equity peer group was -7.04% for the first quarter, slightly underperforming the MSCI Emerging Markets Index by less than 10 basis points. Market volatility due to Russia’s invasion of Ukraine, rising energy prices and inflation all combined to create difficult market conditions to start the year. That said, during the month of March, 65% of active managers rebounded to outperform the benchmark.
In the following spotlight we will examine the characteristics of the top quartile performing portfolios during the quarter and in the month of March, including what factors drove performance. Lastly, we will examine Russian market exposure and where the allocations went within these portfolios.
- Growth and frontier market portfolios generated the best performance led by small cap and value
- Large/mid cap portfolios made up the largest subset of top performers; growth products with smaller cap or frontier market were lead performers
- Quality underperformed modestly, but stable earnings growth was significantly rewarded. High volatility suffered while price momentum outperformed
- In the large/mid strategies, Brazil experienced the largest gains, while Russia and China experienced the biggest decreases
- Top performing growth managers had their allocations to Latin America increase more than 7%, while top performing Value managers’ largest allocation change was in Asia.
Chart 1: Q1 2022 Top Quartile Performance Spreads Q1 & March 2022 Top Quartile Performers Characteristics
The chart above shows the return spreads (including medians) for the top performing actively managed portfolios for the quarter. At a median level, fundamental, growth and frontier market portfolios generated the best performance. Comparatively, as chart 6 demonstrates, small cap and value outperformed from a market perspective. Although nearly half of the top performers during the quarter had a value style (chart 2), the chart above shows that growth managers delivered the strongest median performance.
Chart 2: Q1 & March 2022 Top Quartile Performers Characteristics
Capitalization, specifically large/mid cap portfolios made up the largest subset of top performers at nearly 70%. In fact, large/mid cap quantitative products with a value style were prolific amongst the top performers during the first quarter. As we highlighted in our monthly factor analysis, we have seen a swing back to value within emerging markets over the last year Report | Q1 2022 Factor Performance Analysis. What is intriguing, is that in March we continued to see value factors outperform growth, yet amongst the top performing products we saw a rotation back to growth. As we demonstrate in Chart 2, fundamental, growth products with smaller cap or frontier market focus were lead performers for the month.
Chart 3: March Emerging Factor Performance
Considering we have seen a divergence between the factors driving top performing portfolios and those driving the markets, we examined the factor tilts of the top value performers for the quarter as well as the top growth performers for March. As we noted in the Q1 2022 Factor Performance Analysis (Chart 3), emerging market factors diverged from developed markets in March where Value saw big gains with investors focusing particularly on bottom-line metrics, both earnings, cash flow and shareholder yield. Growth was mostly market neutral with forecast growth 12M, underperforming the worst among all factors driven by significant pullbacks in companies like Tencent, and JD.COM Inc. Quality generally underperformed modestly, but stable earnings growth was significantly rewarded. It appears investors are focusing on fundamentals, both the expensiveness of, and quality of earnings. High volatility suffered while price momentum outperformed. As Chart 4 demonstrates, the top performing value managers followed suit with the leading markets factors that outperformed during the quarter; specifically earnings and yield.
Chart 4: Top Quartile Performers in Q1 – Value Style Factors
Chart 5: Top Quartile Performers in March – Growth Style Factors
Examining the factor tilts for the top performing growth managers, we see forecast growth and sales growth were both positive (as they were for the market), the difference was with regards to forecast growth, especially forecasted sales growth were additive compared to the market. Another key difference is found within the quality factors. For the market, other than earnings growth stability, the quality factors were all negative or neutral while the top performers benefited from forecasted return on equity and return on invested capital.
Chart 6: Emerging Markets Allocation Shifts
Finally, given the impact from the invasion of Ukraine and the subsequent devaluation of the Russian market, we examined the allocation changes during the quarter by active emerging markets equity managers. (Strategy allocations as reported in the IM Global Database; 185 products). At year-end, excluding frontier market and small cap portfolios, active emerging market strategies were overweighted by Russia. As chart 6 demonstrates, the clear beneficiary during the quarter was Latin America, which saw allocations increase by at least 2% across product types. Within the large/mid strategies, Brazil experienced the largest gains (+2.02%) at a median level, while Russia and China decreased by 3.97% and 2.45% respectively. In the emerging markets small cap products we saw the largest decrease to Asia, but unlike the large/mid portfolios, the pullback was in Korea and Taiwan, and not China. There were some differences when examining top performing products versus the overall peer group. Top performing growth managers had their allocations to Latin America increase more than 7%, while top performing Value managers’ largest allocation change was in Asia, where there was a pullback of more than 4.5%
Chart 7: MSCI Emerging Markets Equity Index Returns