Dimensional Fund Advisors’ Emerging Markets Value Portfolio is among the largest mutual funds focused on developing economies, housing $18 billion. Emerging markets have traditionally been seen as an area where active managers have an advantage, given market inefficiencies and the risks involved.
But Dimensional offers a different approach. Although not a pure passive strategy, the group eschews stock-picking in favor of identifying particular characteristics, or ‘dimensions,’ of potentially higher-returning shares.
As its name suggests, this fund adopts a value approach to emerging markets, and performed strongly last year as value returned to favor. We asked portfolio analytics firm Style Research, which specializes in scrutinizing holdings, to provide independent insights.
President, North America
The DFA Emerging Markets Value Portfolio typically holds around 2,000 stocks and is intrinsically more stock diversified than the MSCI Emerging Markets index. The portfolio does have some significant sector and country differences, however. Over the past three years, the portfolio has been typically underweight in information technology (15% underweight as at end March 2017) and overweight materials, energy and financials. While maintaining its internal limit of 17.5% on individual countries, the portfolio has increased its underweight in China from 3% to 12%.
STYLE SKYLINE™ - Diversified Emerging Markets (US Domicile) vs MSCI Emerging Markets end March 2017 (country/sector adjusted)
Source: Style Research/Morningstar
The chart above shows the portfolio’s Style Tilts™ relative to the index as at end March 2017 against the same results for the diversified emerging markets peer group.
Jumping off the page is the book-to-price Style Tilt™ on the far left. This tilt is both extremely significant and the highest in the peer group (all bars show fifth to 95th percentile range). There are also very significant positive tilts across most of the other value factors (blue bars) and very negative tilts to return on equity, and other growth and profitability measures (green bars), including significant biases to weaker sales growth and weaker profit margins. The tilt to smaller-cap stocks is a result of the portfolio being 21% underweight in mega caps. The portfolio has a tilt to high debt-to-equity, which is also consistent with lower quality as a result of a significant value bias.
Value stocks had a remarkably strong 2016 in emerging markets. Despite the value reversal and growth revival in other markets since the turn of the year, specific value factors such as book-to-price and sales-to-price have continued to fare well within emerging markets. A performance study of each of the factors in the Style Skyline™ confirms that the portfolio’s bias to high book-to-price was the strongest positive factor impact on performance both in 2016 and over the year to date.
This portfolio has a very clear focus on book-to-price as its favored value metric – together with a small-cap bias. Although a diversified value approach is evident within sectors and countries, there are significant sector and country differences from the index. Unlike some investment approaches that try to diversify value with quality, profitability and other factors, this portfolio reflects a more dedicated approach to value.