The trust co.'s quant group says merging-market equities still going strong. The slide in Chinese equities that sent market-buckling tremors through international bourses this week notwithstanding, emerging-market equities will continue to form a strong, core element of long-term asset allocation strategies. So at least says a new study by Northern Trust's Global Quantitative Management group.

"Even after a four-year bull run, emerging-market equities still have the ability to provide investors some of the best long-term return prospects in the world. In our view, this asset class has 'grown up' from its volatile past," write Steven Schoenfeld, CIO of Northern Trust Global Investment's Global Quantitative Management group and senior investment strategist Alain Cubeles, co-authors of Emerging Markets Investing: Efficiently Adding Emerging Market Equities to a Global Portfolio.

The study was published about a week ago.

Less risk

"In our quantitative analysis, we have found that measurable risk and volatility have declined in emerging markets over the past 10 years, providing attractive long-term risk-return characteristics and a valuable source of diversification for global equity portfolios," they add.

The study points to on-going structural reforms, reduced volatility and superior growth prospects in developing economies as reasons for the promise of emerging-market equities. The authors suggest that investors use traditional active, quantitative-active, structured, and pure index strategies to allocate their resources most efficiently.

Many economies in emerging markets, which now make up 85% of global population and 48% of global economic output, are growing almost twice as rapidly as in developed markets. They often include blue-chip companies, and foreign currency-denominated debt and fiscal deficits have reduced.

The study cites a 648% cumulative return from the MSCI Emerging Markets Index -- as against 414% and 140% registered by the S&P 500 and MSCI EAFE indices respectively.

"As longtime quantitative strategists, we believe expanded global benchmark choices enable investors to achieve more effective international equity allocations," says Schoenfeld. "Traditional investments in non-U.S. large-cap developed market equities -- often based on the EAFE index -- are evolving to a more diversified approach that increasingly includes emerging markets and international developed market small-cap stocks."

Cubeles adds: "Investors should use a broadly diversified benchmark that covers the entire opportunity set for any asset class. The evolution of global equity benchmarks allows investors to select and manage their international allocations in a structure similar to their U.S. investments." -FWR

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