Russia Stars in Active Managers’ Rare Triumph Over Passive Funds

(Bloomberg) -- Stock pickers in emerging markets are beating the index-tracking competition for the first time in almost half a decade, in part due to the diverging paths of equities in Russia and South Korea.

Active managers posted an average return of 7.09% this year through September after fees, compared with 5.89% for funds that replicate the movements of MSCI’s benchmark index, according to data from Morningstar UK Ltd. That was the first time they topped the benchmark since 2015, the data show.

The superior returns underscore how managers with the ability to move funds around as events unfold can benefit in volatile times. Still, 2019 may prove the exception rather than the rule. Morningstar data show that just 35% of actively managed emerging-market funds have beaten their benchmark index since 2009.

“Exchange-traded funds tend to treat emerging markets as one asset class, but they’re not,” said Magdalena Polan, a global emerging-market economist at Legal & General Investment Management in London. “Active managers have more opportunities to pick, based on fundamental analysis.”

The result can be explained by active managers’ bigger-than-average bets in Russia, while they sidestepped losses in South Korea by holding a smaller position than the benchmark. The 2018 sell-off in emerging markets also damped valuations across the board and helped set the stage for an active-manager comeback as investors picked through the beaten-down assets for bargains.

Russia’s Rally

In Russia, reduced concern about tougher U.S. sanctions, the central bank’s easing path and the best currency performance in emerging markets have helped lift the benchmark stock gauge 29% so far this year, the best in the period since 2016, and 3.5% this month. Active managers were positioned to benefit from the gains, with 3.2% of their portfolio in Russian equities on average, compared with a 2.4% weighting for the benchmark in the first nine months of the year, according to Morningstar.

Meanwhile, active managers were cautious on South Korea, where their average weighting was 9.9% versus 12.9% for the benchmark MSCI index. The nation’s exports were hurt by tariffs connected to the U.S.-China trade war, which may have slowed the pace of economic growth by 0.2% this year, according to Bank of Korea calculations. The Asian nation’s stocks have fallen 3% in dollar terms this year.

Still, active managers’ average performance in emerging-market equities over the past 10 years has lagged behind the respective benchmark indexes, and savers lured by the low fees are sticking with passive strategies.

Morningstar data show $12.1 billion went into funds tracking emerging-market equity indexes as of August this year, while actively managed funds recorded $4 billion of outflows.

--With assistance from Áine Quinn.

To contact the reporter on this story: Selcuk Gokoluk in London at sgokoluk@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson, Srinivasan Sivabalan

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