Passive ‘falls over’ in emerging markets

Passive ‘falls over’ in emerging markets

Passive investment strategies perform well in developed markets like Australia, but investors should be wary of using them in inefficient emerging markets, says India Avenue Investment Management.


Investors should adopt a horses for courses approach when it comes to investing overseas, says India Avenue Investment Management managing director Mugunthan Siva. 

What works in a developed, more efficient market such as Australia may not work abroad. Convenience and cheapness do not necessarily equate to a better proposition for clients, Mr Siva said.

Passive products such as ETFs work well in efficient markets like the US and Australia, but they fall over when they are used in inefficient emerging markets such as China and India.

Research shows that ETFs have dramatically underperformed active managers in these markets. Accessing these markets via ETF means you are leaving returns on the table, Mr Siva said.

India has more than 6,000 companies listed on its two main exchanges, but institutional brokers only research the top 100 to 150 stocks in detail.

If you buy an index strategy for India, you will be holding the good and the bad, including companies which may have corporate governance issues, Mr Siva said.

There is a gulf in valuations and performance between companies with strong and not-so-strong corporate governance in India. Only active management can target these well-run companies.

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Passive ‘falls over’ in emerging markets
India Avenue Investment Management, India, Australia, ETF, passive, active, Mugunthan Siva
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