Portfolio Manager Perspectives

Jeff Benjamin

Emerging idea: A new twist on managing volatility overseas

Aug 16, 2011 @ 12:01 am

By Jeff Benjamin

A new exchange-traded fund from Emerging Global Advisors is putting the emerging back into emerging-markets exposure, and it shows.

The EGShares Emerging Markets High Dividend/Low Beta ETF Ticker:(HILO) is designed for income and low volatility in an investment category not normally associated with such characteristics.

One key distinction between the two-week old ETF, which is pegged to the Indexx Emerging Markets High Income Low Beta Index, is that it avoids some significant country weightings that are included in other popular emerging market index funds.

Specially, the fund does not include South Korea or Taiwan, two countries that combine to represent nearly 26% of the MSCI Emerging Markets Index.

“We believe that South Korea and Taiwan are not emerging markets anymore and our thesis is to never include those countries in this fund,” said Robert Holderith, president and founder of Emerging Global Advisors, which manages $520 million in 19 ETFs.

Avoiding exposure to South Korea and Taiwan, which were upgraded from emerging to developed status back in 1997, is part of what Mr. Holderith hopes will distinguish the new index-based ETF.

Since the fund’s July 29 launch, it has declined by 3.3% during some of the most volatile stock market conditions in recent history.

Over the same period the Vanguard MSCI Emerging Markets ETF Ticker:(VWO), which tracks the MSCI Emerging Markets Index, declined by 11.2%.

Beyond just keeping the fund pure to emerging markets, the index is also geared toward companies that pay higher dividends, with 27 of the 30 names having increased dividends since 2008.

The index is also constructed to screen out the more volatile companies by not including stocks with a beta of more than 1.

Portfolio diversification results from a mandate to include no more than five companies from the same country. This also prevents the index from being overly exposed to any single currency.

The largest country weighting in the portfolio is Malaysia at 18.3%, followed by South Africa at 17.4%.

To illustrate how different this index is from the more established emerging market benchmarks, consider that the MSCI Emerging Markets Index has a 3.3% allocation to Malaysia and a 7.4% allocation to South Africa.

The MSCI Inc. announced in June a review for reclassification of Taiwan and South Korea. But until such adjustments to the index are accomplished, Mr. Holderith can continue to enjoy a major distinction between his new index fund and the more established index that is tracked by more than $100 billion worth of investments.

“As it stands right now, you can own both indexes and they will be complementary to each other,” he said.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.


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