The idea that the frequent occurrence of inefficiencies enables active management to work well in the emerging markets is a relatively common view among investors. An analysis of active fund managers' performance however shows that very few of them outperform in the long term, and even fewer do so in bull markets. In addition, the level of risk they take and their lack of consistency over time make an investor's task in choosing the right strategy excessively difficult. The reason seems to be that many emerging markets do not offer the minimum degree of efficiency that would allow price movements to be reliably predicted through any form of fundamental analysis.

In line with its general philosophy of pragmatism, BNPP AM's International Equity Investments group has designed a model-driven strategy called Emerging Markets Passive Alpha to take account of this environment's specific characteristics. This passive-enhanced approach offers the diversification benefits of a passive approach while taking advantage of certain structural market biases to generate a substantial outperformance over time.

The passive nature of the strategy stems from the fact that no attempt is made to evaluate the attractiveness of a given security. Within each country that qualifies as an emerging market, securities are selected and weighted on the basis of quantitative tools that characterise their importance in the market and their investability.

This brings a broad diversification among many exchanges and sectors throughout the world, as well as a relatively high correlation with the index. It thus limits the risk of any significant underperformance which, by itself, results in attractive returns compared to most of our competitors.

In the meantime, our portfolio construction approach takes advantage of certain structural size and liquidity biases that have a beneficial impact on performance in the long term. This way of generating the product's Alpha is based on an analysis of the performance of the various emerging markets indices over more than fifteen years, to interpret investors' behaviour in various environments.

In addition, the strategy offers remarkable stability over time, which results in low portfolio turnover. Implementation costs therefore remain attractive despite the adverse conditions prevailing in the emerging markets, as a result of higher brokerage fees and taxes, as well as poorer liquidity. This attractive advantage is further enhanced by the team's long experience of executing trades in difficult environments, and under demanding constraints, since the product was launched in 1994.