- A data-centric approach geared toward identifying growth prospects early in the investment cycle
- A process that balances classic growth opportunities with recovery growth opportunities for a smoother return profile
- Small and mid cap focus provides differentiated exposures and direct access to local EM economies.
- The market inefficiencies that exist within the small/mid-cap space increase opportunities for alpha capture.
Expensive beta/Missing alpha1
We believe active management is still very relevant and impactful in Emerging Markets.
Despite this fact, many investors are still allocating towards passive ETFs and active funds that closely track the benchmark.
Active share2 measures active management. The graphic on the right shows that many EM funds are not delivering real differentiation from their benchmark. In other words, your active EM allocation might just be expensive beta.
JOHCM Emerging Markets Small Mid Cap Fund (JOMMX) is a truly actively managed fund with an active share of over 99%.
*A closet index fund is one that claims to actively select securities, but the resulting portfolio largely resembles the benchmark.
Real diversification benefits
EM exposure creates increased diversification benefits for client portfolios given that the opportunity set is spread across 26 countries each with unique country drivers.
Today, many EM funds have strong overweights in Large Cap Chinese Internet/Consumer companies. To achieve the real diversification that EM has to offer, it helps to go down the market cap spectrum.
JOMMX can enhance diversification with highly differentiated country and sector exposures.
We believe it’s important to diversify EM exposure as the disruptive megatrends of degloblization and decarbonization will shift the paradigm. What worked over for the last few decades, may not work in the next.
Compelling track record
Investors have historically viewed EM small-cap stocks as very risky. As the accompanying chart illustrates, EM Small Cap investing has delivered slightly more risk (as measured by standard deviation) since the start of 2015, but they have also generated higher returns for investors.
Through its disciplined process, the JOHCM Emerging Markets Small Mid Cap Equity Fund (JOMMX) has delivered top decile performance since inception and is currently ranked #1 in the Morningstar Diversified Emerging Markets Category.
The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The Fund’s current performance may be lower or higher than the performance data quoted. Investors may obtain performance information current to the most recent month-end, within 7 business days at www.johcm.com or by calling 866-260-9549 or 312-557-5913.
1 Alpha is a measurement of a fund’s risk-adjusted performance against its index. Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole.
2 Active Share measures the fraction of a fund’s portfolio (based on position weights) that differs from the benchmark index.
3 Source: Morningstar Direct. Data from 12/17/2014-03/31/2022. Morningstar Diversified emerging-markets portfolios tend to divide their assets among 20 or more nations, although they tend to focus on the emerging markets of Asia and Latin America rather than on those of the Middle East, Africa, or Europe. These portfolios invest predominantly in emerging market equities, but some funds also invest in both equities and fixed income investments from emerging markets.
© 2022 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar rankings are based on total returns. The Morningstar Percentile Ranking compares a Fund’s Morningstar risk and return scores with all the Funds in the same Category, where 1% = Best and 100% = Worst. For the time period 01/01/2015-03/31/2022 the JOHCM Emerging Markets Small Cap Fund was ranked 1st%ile (1st/602 funds) in the Morningstar Diversified Emerging Markets Category. Rankings are for Institutional shares only. Other share classes may differ.
4 Standard deviation is a statistical measure of distribution around an average, which depicts how widely returns varied over a certain period of time. When a fund has a high standard deviation, the predicted range of performance is wide, implying greater volatility.
5 The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. With 1,399 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Small Cap Index includes small cap representation across 24 Emerging Markets countries. With 1,766 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country. The small cap segment tends to capture more local economic and sector characteristics relative to larger Emerging Markets capitalization segments.