Actively managed emerging market funds may be capable of consistently outperforming their benchmark, research has shown, according to The Financial Times. This improved performance only happens if the funds “are given the freedom to take punchy bets” and notion runs counter to overwhelming evidence from developed markets suggesting that very few funds are capable of consistently beating their underlying index. “Much of this outperformance appears to have come from genuinely active managers’ ability to underweight state-owned (or rather state-controlled) companies, which are commonplace in emerging markets but typically produce poor returns.” Steven Holden, founder of Copley, finessed the research and may have found a way to identify funds with a greater shot at outperforming by looking at the correlation between the fund and its underlying index, “expressed in a weighted R-squared figure, which explains what proportion of the fluctuation in the value of a fund is explained by fluctuations in the index itself.” Holden says “the results show a clear link between fund performance and the level of independence from the benchmark index.”

While we’re on the topic, foreign investors need to be more selective about where they allocate funds in emerging markets, Sid Verma writes for Bloomberg. “Overseas investors now own 27.8% of the region’s bonds, led by South Africa, the Czech Republic and Russia,” the piece says, which puts “markets there at risk of a sudden exodus if US and euro-area officials tighten monetary policy more than analysts expect.” Bloomberg indexes found that “government notes from EMEA [are] up 15% in USD terms, beating the 9.2% average return for all emerging markets.” Egypt, South Africa, Russia, Colombia, and Peru — all markets that are “vulnerable to external shock” — are especially crowded at the moment, suggests Deutsche Bank AG strategist Christian Wietoska, says that levels have not yet reached the extreme but still advises caution.