A good Emerging Market fund - Luca Bolognese

A good Emerging Market fund

Luca -

☕ 1 min. read

If you are look­ing for a good fund for this cor­ner of your port­fo­lio, you might want to con­sider Eaton Vance Structured Emerging Mkt (EAEMX). There is also a much cheaper ver­sion (EITEX), but it is open just to folks with a fi­nan­cial ad­vi­sor.

It is a me­chan­i­cal fund. Here is how their strat­egy works (as far as I un­der­stand it):

  1. They di­vide EM mar­ket coun­tries in 4 cat­e­gories, they as­sign a weight to each cat­e­gory (I.E. 20% to tier1, 30% to tier2 etc)
  2. For each cat­e­gory they equal weight each coun­try in the cat­e­gory (I.E. in tier1 equal weight Russia, Mexico, etc)
  3. For each coun­try they equal weight each sec­tor
  4. They ac­tively har­vest tax losses

The end re­sult is as fol­lows:

  1. Smaller coun­try have more weight than in a nor­mal Em.Mkt. fund. This is good be­cause:

  2. Smaller mar­kets have had higher re­turns in the past

  3. Smaller mar­kets are less cor­re­lated than large mar­kets both among them­selves and against the SP500

  4. Equal weight­ing the sec­tors has the fol­low­ing pos­i­tive ef­fects:

  5. You get more ex­po­sure to sec­tors, like Services, that are go­ing to ben­e­fit from eco­nomic growth

  6. You avoid the commodity ef­fect’: the ten­dency of Em.Markets to fall when com­modi­ties prices fall be­cause such a large slice of their econ­omy is based on it

  7. It is ex­tremely tax ef­fi­cient be­cause:

  8. The me­chan­i­cal strat­egy lends it­self to low turnover

  9. They ac­tively har­vest tax losses

In essence they max­i­mize the pos­i­tive ef­fects of di­ver­si­fi­ca­tion and tax ef­fi­ciency, which are very sta­ble ef­fects. They are math­e­mat­i­cally prov­able 🙂 The real time re­sults con­firm the the­ory as this has been one of the best per­form­ing Em. Markets funds with the low­est stan­dard de­vi­a­tion and best tax ef­fi­ciency. No-one knows what the fu­ture holds, but there is a good chance that this will con­tinue to be the case.

I don’t own it cur­rently be­cause I don’t like the high fees, but the strat­egy makes so much sense that I might end up buy­ing into it.

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A good Emerging Market fund

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