Market participants are increasingly aware of the inherent flaws of the most popular EM indices. They tend to allocate funds according to basic weighting schemes instead of identifying opportunities as they arise. To beat these benchmarks, portfolio managers must innovate and deviate from the index.
In this article, we discuss the investment process necessary to build the top-down factor-based strategy and we select emerging market countries worth investing. It is something new for us as our previous strategies are stocks only bottom-up oriented, but we are very satisfied with the results obtained.
First, we rank emerging countries by their adjusted by PPP GDP. Second, we go down that list and pick those meeting the five criteria of high-quality data: completeness, consistency, accuracy, validity, and timeliness. About twelve countries have all the time series necessary to build our strategy. We will eventually add more countries as data becomes available in the future.
We identified ten factors that may act as drivers of return for emerging countries. You will find each of them, how they are ranked, their short definition and importance in the table below. For those interested to see how each emerging country rank relative to others for each factor, these charts are available for free (this quarter only) to registered members of our website.