Subjectivity mitigated by robust research

Dimensional Fund Advisors’ Emerging Markets Value Trust’s disciplined approach delivering not only returns but consistency has helped it take out the top Emerging Markets Equities spot at the Financial Newswire/SQM Research Fund Manager of the Year Awards.

The systematic, rules-based process leveraged by the fund is only one facet contributing to its success; combined with quantitative research, its “active process-driven pursuit” of the value premium is, according to Rob Ness, Senior Portfolio Manager and Vice President, its driving force.

“Essentially, what we do is offer investors broadly diversified exposure to emerging markets equities along with the systematic pursuit of higher expected returns,” he told Financial Newswire.

“We know the value premium is supported by strong empirical evidence. But we also know that realised premiums are not positive in every period. So, our approach is to maintain a consistent focus on value stocks. This ensures we capture the premium when it does appear.

“And that is what we saw in 2022/23. Alongside a consistent, disciplined focus on value, the fund benefits from our skill in implementation. Emerging markets are not only volatile, but costs and frictions can be significant.

“That requires flexibility in execution so that we avoid the costs of seeking immediacy when we trade. Over the years, we’ve built up fairly robust, systematic and scalable processes for navigating these markets.”

With over 40 years of global experience and just under 30 in Australia backing the value-oriented fund, it is no wonder it comes perfectly equipped to fulfil its task no matter the market conditions.

“We don’t base our approach on trying to outguess the market. We believe emerging markets can play an important role in a globally diversified portfolio,” Ness said.

“They have their challenges, but they continue to evolve in their structures, market mechanisms and accessibility. Investing in them requires a long-term perspective as well as expertise and flexibility in navigating change. That’s always been the case. And we’d expect that to continue.”

The fund delivered a return of 12.35 per cent in the last financial year, nearly five percentage points above the MSCI Emerging Markets Value Index and over seven percentage points above the MSCI Emerging Markets Index. The results speak to the philosophy seen across Dimensional’s suite of strategies: “a belief in the power of markets”.

“Rather than trying to predict the future or outguess prices, we draw information about expected returns from the market itself,” Ness said.

“We think markets do a pretty good job overall of processing information and driving it into prices. So, we use the market as a starting point and then look for the areas of the market with higher expected returns.

“In the case of equities, that’s small company stocks, value stocks and more profitable companies. From there, we seek to add value through implementation.”