Viewpoints

Emerging Market Investing: A Multi‑Asset, Granular and Dynamic Portfolio Approach

This Research paper is a joint effort between PIMCO and GIC, Singapore’s sovereign wealth fund. GIC authors Grace Qiu Tiantian Ph.D., Ding Li, and Zhihui Yap collaborated with PIMCO’s Josh Davis, German Ramirez, and Helen Guo to produce this report.

Executive Summary

  • We propose an intuitive and practical approach to building a multi-asset, regionally balanced emerging markets (EM) portfolio. This approach presents three key potential benefits:
    • More effective diversification – a risk-balanced approach between asset classes, countries, and regions
    • Dynamic overlay – a dynamic tilting process integrating valuation-aware return signals with a tracking error budget
    • Flexibility – a modular design that can be readily calibrated to different investors’ investment beliefs, return objectives, and risk tolerances
  • We start by discussing the sub-optimality of traditional market-cap-weighted EM benchmarks. Such indices are concentrated in a few countries, lack consistency across asset classes, and may not reflect economic fundamentals.
  • Second, we delve into the advocated asset allocation framework comprising two key building blocks:
    • A risk-based anchoring portfolio with balanced risk budgets across asset classes and regions
    • A valuation-aware overlay reflecting return signals (e.g., based on value and carry)
  • Through an illustrative case study, we demonstrate how the portfolio construction process seeks to deliver results superior to naïve market-cap-based benchmarks across multiple dimensions:
    • Higher risk-adjusted returns
    • Shallower drawdowns
    • Better diversification benefits, as measured by beta to a 60/40 developed market (DM) portfolio
  • While there is no single ideal approach to investing in emerging markets, this framework illustrates the potential benefits of a risk-balanced and valuation-aware approach, offering promise even for those who remain skeptical of the merits of EM investing.
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Disclosures

Past performance is not a guarantee or a reliable indicator of future results.

The models, scenarios and decisions included here are not based on any particular financial situation, or need, and are not intended to be, and should not be construed as a forecast, research, investment advice or a recommendation by GIC Private Limited (“GIC”) or PIMCO for any specific PIMCO or other strategy, product or service. Individuals should consult with their own financial advisors to determine the most appropriate allocations for their financial situation, including their investment objectives, time frame, risk tolerance, savings and other investments.

The analysis contained in this paper is based on hypothetical modeling. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program or strategy. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading or modeling does not involve financial risk, and no hypothetical example can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses, are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved. Return assumptions are for illustrative purposes only and are not a prediction or a projection of return.

Exhibits are provided for illustrative purposes and are not indicative of the past or future performance of GIC nor of any PIMCO product. It is not possible to invest directly in an unmanaged index.

Excess return cited herein is on over the 1-month U.S. dollar Libor rate, unless otherwise stated.

Return assumption is an estimate of what investments may earn on average over the long term. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. These figures are not indicative of the past or future performance of any PIMCO product.

All investments contain risk and may lose value. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. The use of leverage may cause a portfolio to liquidate positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a portfolio to be more volatile than if the portfolio had not been leveraged. Diversification does not ensure against loss.

This article was created in collaboration with GIC’s Economics & Investment Strategy Department. PIMCO is not affiliated with GIC.

This material contains the current opinions of the authors and not necessarily the manager nor of GIC and such opinions are subject to change without notice.  This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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