Emerging markets excelled in the second quarter, driven by Taiwanese and Indian equities, despite Mexican setbacks. Ronald van Genderen concludes this edition of the Morningstar Fund Radar with insights on promising strategies like Robeco QI Emerging Conservative Equities.
Emerging markets experienced a fine second quarter of the year with a 5.75 percent return in euros for the Morningstar EM TME index. This brings the return for the first half of the year to 10.73 percent. Although emerging markets represented by the Morningstar Global TME managed to stay ahead of global equities with a return of 3.71 percent in the second quarter, an underperformance of around 4 percentage points remains year-to-date.
The good performance was driven in part by Taiwanese equities, which were able to register a plus of 15 percent in the second quarter. After also achieving a 14 percent return in the first three months, the Taiwanese stock market has gained more than 31 percent up to the end of June. This makes it the second best-performing stock market after Turkey in 2024.
Chip and AI stocks
Stocks with exposure to AI and chips were of particular interest to investors, including Taiwan Semiconductor Manufacturing Co (TSMC), Hon Hai Precision Industry Co, MediaTek and Quanta Computer. These are the four largest companies in the local index and after prices already rose sharply last year, with the exception of Hon Hai Precision Industry Co, prices went up by tens of percent again over the first six months this year.
Another country that stands out positively this year is India. Like many other countries around the world, elections were held this year. The Indian elections took place in seven phases and started on 19 April to end only on 1 June. Ahead of the elections and the election results, investors were hopeful that incumbent Prime Minister Narendra Modi would be re-elected, as the Indian economy had benefited from the policies pursued during his two terms in office.
India election disappointment shortlived
By early June, the Morningstar India TME index was up over 14 percent. While Modi was indeed re-elected and allowed to start a third term, it was with considerably fewer votes than expected and the Indian stock market reacted with a day-long loss of 7 percent. The disappointment was short-lived, however, as a recovery followed shortly afterwards and Indian equities continued their upward trajectory, now listing 20 percent higher for the year.
The Mexican stock market fared less well. Here too, elections took place and the population had the chance to elect a new president for the next six years, among other things. In the run-up to the elections and on election day, the country and stock markets were turbulent as Mexican shares slowly fell. After it was announced that the leftist Claudia Sheinbaum had won a landslide victory, the fence was up and the Mexican stock market lost almost 9 percent in one day. This puts the return for the first half of the year at a loss of over 13 percent.
Robeco QI Emerging Conservative Equities fund
The strategies that appear prominently on Morningstar’s radar either have a solid management team and a sound investment process in the qualitative opinion of the fund analysts, or are attributed these qualifications based on an algorithm that evaluates investment funds based on the same framework as the fund analysts. In this edition, we highlight a fund that meets all these criteria. Robeco QI Emerging Conservative Equities receives the highest possible rating, or High, from Morningstar’s analysts on the People Pillar, while the Process Pillar rating is Above Average. This results in a Morningstar Medalist Rating of Silver.
The fund is part of Robeco’s quantitative, conservative equity range managed by a six-member team led by Pim van Vliet. His academic work has provided the conceptual basis for this strategy’s investment philosophy. This stable and experienced management team is well supported by more than a dozen quantitative analysts, led by David Blitz and Weili Zhou, who are dedicated to research and development of the model. This highly regarded team is essential to the fund’s success as they continually refine the systematic process.
Rule-based, systematic process
Its key strengths include its academic foundation, repeatability and disciplined execution of the process. The rule-based, systematic process is centred around a proprietary stock selection model based on empirical research showing that investing in low-risk stocks leads to superior risk-adjusted returns. However, the strategy goes beyond traditional low-volatility investing by combining value, quality, sentiment and momentum signals to improve the overall risk-return profile. The team aims to hold the highest-ranking stocks in its portfolio, while at the same time trying to limit portfolio changes.
The model steers the portfolio towards the stocks with the lowest volatility in the universe. This generally leads to a more defensive profile relative to the benchmark and sector peers. The strategy favours cheaper stocks with above-average dividends and positive momentum. The diversified portfolio of 200 to 300 stocks has long shown a preference for mid- and small-caps compared to the index. Nevertheless, it does invest in mega-caps, including TSMC, which is also the largest position in the portfolio as of end-May 2024. The portfolio shows a structural underweight in the technology sector, which favours defensive sectors such as defensive consumer staples, healthcare and utilities.
On a country basis, the portfolio is overweight Taiwan and several smaller benchmark countries such as Malaysia and Thailand, while it is underweight index heavyweights such as China, India and South Korea.
Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners. This article originally appeared in Dutch on InvestmentOfficer.nl.