A good Emerging Market fund

Luca Bolognese - Feb 2007

If you are looking for a good fund for this corner of your portfolio, you might want to consider Eaton Vance Structured Emerging Mkt (EAEMX). There is also a much cheaper version (EITEX), but it is open just to folks with a ﬁnancial advisor.

It is a mechanical fund. Here is how their strategy works (as far as I understand it):

They divide EM market countries in 4 categories, they assign a weight to each category (I.E. 20% to tier1, 30% to tier2 etc)
For each category they equal weight each country in the category (I.E. in tier1 equal weight Russia, Mexico, etc)
For each country they equal weight each sector
They actively harvest tax losses

The end result is as follows:

Smaller country have more weight than in a normal Em.Mkt. fund. This is good because:
Smaller markets have had higher returns in the past
Smaller markets are less correlated than large markets both among themselves and against the SP500
Equal weighting the sectors has the following positive effects:
You get more exposure to sectors, like Services, that are going to beneﬁt from economic growth
You avoid the ‘commodity effect’: the tendency of Em.Markets to fall when commodities prices fall because such a large slice of their economy is based on it
It is extremely tax efﬁcient because:
The mechanical strategy lends itself to low turnover
They actively harvest tax losses

In essence they maximize the positive effects of diversiﬁcation and tax efﬁciency, which are very stable effects. They are mathematically provable 🙂 The real time results conﬁrm the theory as this has been one of the best performing Em. Markets funds with the lowest standard deviation and best tax efﬁciency. No-one knows what the future holds, but there is a good chance that this will continue to be the case.

I don’t own it currently because I don’t like the high fees, but the strategy makes so much sense that I might end up buying into it.

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