Active’s Advantage in Emerging Markets

December 6, 2022

Active management can be the lynchpin to finding investing success in emerging markets (EM), according to Investment Adviser Association member PIMCO. The Newport Beach, California-based asset manager explores the changing landscape of EM investing and why EM is an “asset class that naturally lends itself to active management” in a recent article in Investment Week.

Pramol Dhawan, PIMCO’S head of emerging markets portfolio management, discussed the growing landscape for EM opportunities and PIMCO’s active strategies. He points out that there are more opportunities in EM now than two decades ago, as countries “built up their U.S. dollar assets and further developed local bond markets” which, in turn, “created a more investable climate for foreign investors.”

Dhawan explains that due to “growing nuance and breadth of opportunities” investors no longer “need to adopt a high-risk, high-reward approach” and that EM investing can be part of a broader, diversified investment strategy.

However, Dhawan points out that the skills of an active manager are required to navigate the broad and ever-changing landscape surrounding EM, as well as to capitalize on the nuances that present themselves in the sector.

For example, an active manager can take advantage of market inefficiencies, which are rife in EM nations. An active manager can also deliver by adjusting for costs present, including transaction costs, tax withholdings, and capital gains, as well as take advantage of arbitrage opportunities that are still present due to the maturing nature of EM.

“You have this rich tapestry of opportunities whereby if you are thoughtful, structured and somewhat systematic in your approach, you can structurally add value as an active  manager without taking too many large bets,” said Dhawan.