New research published by Macquarie Funds Group warns investors to scrutinise their fund manager's selection strategy for their emerging markets investments.
The paper analyses the benefits of a macro approach to emerging market investing.
The paper outlines why investors should look to an emerging markets manager who utilises a top-down country approach, as opposed to a bottom-up selection approach favoured by some managers.
Through testing the sources of emerging market returns across countries, industries and stocks, the paper concludes that successful country selection is a more significant factor in equity returns than those of company fundamentals.
"Our research has shown that regardless of the strength or weakness of a company's fundamentals, in emerging markets the biggest single factor to weigh on the performance of a stock is the overall performance of the country in which it is listed," Macquarie BRIC Advantage portfolio manager David Dali said.
Dali said this was particularly evident in China during the global financial crisis, when the performance of many stocks closely correlated to the world's view of the Chinese economy.
As a result, Macquarie believes it is important for an emerging markets fund to hold very liquid exposures and be able to retreat to the safe haven of cash during periods of extreme volatility.
"One of the strongest investment themes under consideration by institutional investors is the strength of the emerging market growth theory," Dali said.
"There is a confluence of factors pointing to emerging markets, particularly Asia, as potentially the growth engine for the world over the next decade," he said.
