A decade of returns and volatility in Emerging Markets

Since the dot.com-inspired lows of the early 2000s, Emerging Markets have delivered healthy returns to investors, but not without volatility. Over the period from the start of 2002 to the end of 2012 the MSCI Emerging Markets (USD) index has experienced an annualized volatility of 21%p.a.,and a largest drawdown of -65% during the period 2008-2009. These occasional large drawdowns and periods of volatility continue to worry investors.

Is there an approach to investing in Emerging Markets that can help?

A strategy which gained exposure to the MSCI Emerging Markets index using a volatility controlled approach, where exposure was scaled back during periods of heightened volatility delivered a higher sharpe ratio and lower drawdowns over the period, although returns can appear un-spectacular compared to the risk-unconstrained approach of allocating a fixed market exposure.

Which return stream do you prefer?

EM1

MSCI Emerging Markets Annual Excess Return1/1/2002 – 31/12/2012 Annualized Volatility1/1/2002 – 31/12/2012

Sharpe Ratio

Max Drawdown(%)

Volatility Controlled 12%

9%

12.7%

0.71

-37%

Volatility Uncontrolled

12%

21%

0.56

-65%

Market exposure of a Volatility Controlled investment in Emerging Markets 2002 – 2012

EM2

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s