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Research reveals rise of multi-factor strategies in emerging markets

By Maja Garaca Djurdjevic
4 minute read

To address the challenges of navigating emerging markets equities, a multi-factor approach has emerged as a compelling alternative for Australian investors.

New research from VanEck has suggested that diversified multi-factor approach to emerging markets (EM) equities could deliver consistent outperformance and effective risk management in this dynamic market segment.

Investing in EM has historically been complex due to various financial laws, taxes, and access issues across different countries. While the traditional “active” approach involves relying on professional fund managers to navigate these complexities, data shows that many active managers have struggled to consistently outperform benchmarks.

Namely, data has revealed the median active manager has underperformed the benchmark in 10 out of 14 calendar years.


“Emerging markets have long established their significant growth potential. However, harvesting that growth in an investment portfolio has proved challenging,” acknowledged portfolio manager and key author of the research paper, Factor-in Emerging Markets, Cameron McCormack.

“Investing in emerging markets is associated with being expensive because brokerage fees are higher and these markets require more specialist knowledge, so many investors have been happy to pay higher fees to for active management where a professional picks the stocks. The problem is that the majority of these professional investors have underperformed the market.”

McCormack explained that ultimately, many investors have been paying a premium for underperformance in emerging markets equities.

The dispersion in active returns year on year is significant – it is not uncommon for the difference between the top manager and the bottom manager to be 45 per cent over a single 12-month period,” he said.

Moreover, while passive approaches, such as factor investing, have gained popularity in developed markets (DM) and are now being explored in EM as well, applying single factors like value and quality in EM can be challenging due to volatile calendar year performance and high return dispersion driven by economic cycles and country-specific factors.

“Single factor approaches cannot be relied upon,” said McCormack.

“Active managers have failed to exploit factor and qualitative approaches and combinations of these, nor have they been able to exploit high country return dispersion to achieve excess returns. An alternative passive approach for investors involves multiple factors.”

According to VanEck’s research, the multi-factor approach targets four factors – value, low size, momentum, and quality – to create a diversified strategy that aims to outperform the market capitalisation benchmark over the long term.

“The combination of the four factors capturing both cyclical and defensive characteristics reduces the need to implement factor timing as a potential way to outperform,” said McCormack.

“Our research shows this multi-factor approach has outperformed the benchmark nine of the last 14 years and most single factors,” he added.

Looking ahead, VanEck noted that as the landscape continues to evolve, adopting a comprehensive approach that leverages the strengths of various factors will be key to navigating the intricacies of EM equities and achieving long-term investment success.