The Best Way to Time Emerging Markets Funds is to Stay Invested

In recent decades, mutual funds have emerged as a preferred investment vehicle, particularly appealing to investors seeking professionally managed portfolios. Among these, funds dedicated to Emerging Markets (EM) have seen a steady rise in popularity. This month’s piece of research¹  delves into an empirical investigation of market-timing strategies employed by investors in EM, with a particular focus on short-term determinants of fund flows and the assessment of investor timing. 

To gauge investor timing abilities, the paper introduces a new metric called the ‘performance gap.’  This metric is defined as the dollar-weighted return minus the time-weighted return. The study finds that the average performance gap across all funds is negative and statistically significant. Specifically, it is determined to be -0.05% (-0.60%) per month (per annum) for equity and -0.06% (-0.72%) for fixed income, highlighting a consistent trend of suboptimal timing decisions made by investors.

Interestingly, the negative performance gap persists irrespective of the investment strategy declared by the fund manager. However, certain categories of funds, such as fixed income corporate funds and equity growth funds, exhibit more pronounced negative performance gaps, indicating suboptimal timing decisions in these segments.

The insights presented in this study advocate for a repositioning towards time-weighted investment strategies, offering a more prudent and potentially lucrative approach for investors in the dynamic landscape of Emerging Markets.

¹Cagnazzo, Alberto, Market-Timing Performance of Mutual Fund Investors in Emerging Markets (April 10, 2020). Available at SSRN: https://ssrn.com/abstract=3364879 

Benoit Lahaye
Junior Investment Analyst

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Disclaimer

The figures, comments, opinions and/or analyses contained herein reflect the sentiment of RAM with respect to market trends based on its expertise, economic analyses and the information in its possession at the date on which this document was drawn up and may change at any time without notice. They may no longer be accurate or relevant at the time of reading, owing notably to the publication date of the document or to changes on the market.
This document is intended solely to provide general and introductory information to the readers, and notably should not be used as a basis for any decision to buy, sell or hold an investment. Under no circumstances may RAM be held liable for any decision to invest, divest or hold an investment taken on the basis of these comments and analyses. 
RAM therefore recommends that investors obtain the various regulatory descriptions of each financial product before investing, to analyse the risks involved and form their own opinion independently of RAM. Investors are advised to seek independent advice from specialist advisors before concluding any transactions based on the information contained in this document, notably in order to ensure the suitability of the investment with their financial and tax situation.
Past performance and volatility are not a reliable indicator of future performance and volatility and may vary over time, and may be independently affected by exchange rate fluctuations.