Even as far back as 1994, when most of the established emerging markets of today were frontier markets, and the only readily available index was the International Finance Corp.’s Emerging Market Database, Bob Breshock and Greg Johnsen, managing director and senior portfolio manager, respectively, at Parametric Portfolio Associates, believed firmly in diversification as the best long-term strategy for investing in developing markets.
Today, the world has changed a great deal and there are multiple indices to follow and a swath of countries to invest in that were not anywhere close to being on the map in 1994. But for Parametric, which manages the Parametric Emerging Markets Fund and the Parametric Tax-Managed Emerging Markets Fund, diversification is still the name of the game.
“We came to it and we still are from the desire to build a portfolio that can deliver a lower volatility experience, since volatility can damage returns, and that means that broad diversification is very important for us,” Johnsen said. “Back then, we were looking at getting broad country exposure and we still are.”
Unfortunately, most indices, both in 1994 and today, don’t really allow for the kind of broad diversification that Parametric wants. For instance, the popular MSCI Emerging Markets Index, for instance, has a two-thirds weighting toward the five largest emerging markets countries and ditto for the FTSE Emerging Market Indices, Johnsen said.
Avoiding those concentrations and the correlations they’re bound to result in is the best way forward, he said, and that’s why Parametric chooses to spread assets between standard emerging markets and frontier markets.