Emerging markets is an asset class that naturally lends itself to active management. Pramol Dhawan, Head of Emerging Markets Portfolio Management at PIMCO, explains that the investing environment is very costly to replicate in passive strategies that struggle to take advantage of inefficiencies in the market.
An active manager can have more nuanced processes that adjust for the costs present in the index, including capital gains and withholding taxes as well as transaction costs.
Dhawan explains that PIMCO uses a proprietary beta enhancement process that reduces much of the cost and gives PIMCO's emerging market strategies a competitive advantage over passive vehicles, as well as other active managers.
He highlights that emerging markets are still a maturing asset class ripe for arbitrage opportunities and other ways to outperform the index. This involves finding instruments with better value. This can include moving between cash and derivatives products as well as between local and external markets. There are also opportunities to capitalise on slower-moving trends and investors crossing over in the asset class.
He says: "You have this rich tapestry of opportunities whereby if you are thoughtful, structured and somewhat systematic in your approach, you can structurally add value as an active manager without taking too many large bets."
Read the full interview here.
