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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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emerging markets value: a rare ray of sunshine from GMO's strategists

GMO monthly issues their "7‐Year Asset Class Real Return Forecasts" for 10 - and, beginning this month, 11 - asset classes. Their method is fairly simple: assume that things - P/E ratio, profit margin, sales growth and dividend yield - will revert to "normal" over the next 5-7 years and sketch the line from here to there. The "real" part is that you deduct the effect of inflation from the resulting "nominal" returns.

Several scholars have examined their predictive validity and found it to be pretty robust. One, examining projections from 2000-2010 then comparing them with Vanguard index funds concluded:
The correlation between the GMO predicted returns and the Vanguard realized returns for equities, bonds, and all assets taken together are 0.954, 0.959 and 0.677 respectively. (Tower, 2010)
Others found that even when the absolute values are off (i.e., GMO was too pessimistic during the frothier parts of bull markets), the relative values are right: GMO's top-ranked asset class tends to outperform its second-ranked class, and so on. Ben Inker, their chief strategist, claimed a 94.5% accuracy (2012).

As recently as September, the real return projections were negative for every asset class except cash. They were least negative about the emerging markets. The newest projection released today begins to factor-in the effect of the recent market turbulence. Bad news: cash remains the most promising US asset class, with US equities in the red over the next 5-7 years and US fixed income breaking even. Good news: there is one asset class now poised for historically exceptional returns, emerging market value equity. GMO projects a 7.7% annualized real return for EM value, well above the historic 6.5% real return in the US stock market. Emerging equity, as a whole, is the second-highest asset class (4.4% real) and emerging debt (2.8%) is third. The one caveat: these asset class return projections are not risk-adjusted; that is, there's no suggestion about how much volatility you'll need to accept in return for your hoped-for 7.7% real.

Traditionally value investing in the emerging markets has been painful and, mostly, unprofitable. Managers at Seafarer and elsewhere argue that structural changes in the emerging markets - largely marked by local investor activism - has fundamentally changed that equation and that long-ignored value plays offer ... well, exceptional value. As a result, there are relatively few EM value funds though their ranks are growing.

Based on YTD performance (as of 11/21/18), here are the top 10 EM value funds available to domestic investors:
  • BlackRock EM Equity Strategy
  • American Beacon Acadian EM Managed Volatility
  • T. Rowe Price EM Value
  • Schwab Fundamental EM Large Company Index Fund
  • Pzena EM Value
  • Dreyfus Strategic Beta EM Equity
  • State Street Disciplined EM
  • SA EM Value
  • Seafarer Overseas Value
Pzena, T Rowe and Dreyfus sport five-star ratings from Morningstar. Dreyfus and T Rowe have also earned Great Owl designations from MFO for their consistently top-tier risk-adjusted returns. State Street and SA (for Strategic Advisers, a set of funds offered to certain Fidelity clients) trail with two-star ratings. BlackRock and Seafarer are relatively new funds.

On the your choices in the upcoming December issue of Mutual Fund Observer.

Take care,



  • Thanks to David for doing all the leg-work on researching these EM value funds. I find the performance comparisons among the several funds surprising in that Seafarer seems to be a laggard. This is surprising to me, a former shareholder, and maybe to MFO participants who have voiced quite steadfast support for Mr. Foster. Over the last 25 years, when I have been a market participant, I haven't made much money in EM and I certainly have not been compensated for the risks. Grandeur Peaks's latest letter to shareholders, a "mea culpa," says they had too much exposure to EMs. Granted, there's no place to hide these days; EMs seem to offer the least protection, but never fail to attract the soothsayers who prod the unwary to catch the next wave up. The TRP EM value fund does have a good, though short, record.
  • Why is CEMVX not on this list?
  • @VF: And why should they? 1 yr high $15.72 _ now $11.78
  • @Derf. What's that got to do with anything???

    How do good (sic) large cap growth funds perform in bear markets? Causeway is respected and CEMVX has over $4B in assets. Clearly someone believes it should be used for Emerging Market Value investing.

    We are trying to find EM value fund to invest for next 7 years. And we want to look at YTD performance to decide what makes the list? And very conveniently we laud Causeway as an international value manager, but not it would seem we can't mention CEMVX because we are worried people will think its YTD is so bad people will not like it?

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