The Case For Fundamentally Indexing Emerging Markets
If you are a student of Fundamental Indexing, you would know that a significant source of the value-add is through the reduced participation in pricing bubbles (more specifically, the reduced exposure to high P/E stocks during the subsequent bursting of said bubbles). Since Emerging Markets are more prone to pricing bubbles (as those markets are materially less efficient than domestic stock markets), you would expect to find more value add in that space. Historically, this has indeed been the case.
Let’s look at the 10 best performing Emerging Markets mutual funds in Canada (C$ denominated) that pay a trailer of 1.00%, with 10 year performance data to the end of March, 2009:
|
10 Year Return |
Mgt Fee |
MER |
Trailer |
|
|
FTSE RAFI Emerging Markets Index (C$) |
15.81% |
n/a |
n/a |
n/a |
|
AGF Emerging Markets |
7.78% |
2.50% |
2.85% |
1.00% |
|
Renaissance Emerging Markets |
5.08% |
2.00% |
2.90% |
1.00% |
|
TD Emerging Markets |
4.77% |
2.25% |
2.73% |
1.00% |
|
BMO GDN Emerging Markets |
4.38% |
2.25% |
2.75% |
1.00% |
|
CI Emerging Markets |
3.78% |
2.25% |
2.58% |
1.00% |
|
MSCI Emerging Markets Free Index - Gross (C$) |
3.22% |
n/a |
n/a |
n/a |
|
BMO Emerging Markets |
3.18% |
2.00% |
2.53% |
1.00% |
|
Fidelity Emerging Markets A |
3.15% |
2.00% |
3.06% |
1.00% |
|
Templeton Emerging Markets |
2.90% |
2.50% |
2.94% |
1.00% |
|
HSBC Emerging Markets I |
1.15% |
2.25% |
2.67% |
1.00% |
|
PRO FTSE RAFI Emerging Markets Index Fund |
Inception: |
1.80% |
2.20% |
1.00% |
What you’ll see is that the FTSE RAFI Emerging Markets Index (C$) outperformed the best actively-managed mutual fund quite handily. Our PRO FTSE RAFI Emerging Markets Index Fund tracks this index, with the lowest management fee and the lowest MER, and still offers a 1.00% trailer for the B-Class Units.
An initial investment compounding at 7.78% would more than double over ten years, but would more than quadruple over the same time period if it compounded at 15.81%.
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