What to Avoid in Emerging Markets
Last week we had the pleasure of speaking with Timothy Reynolds, Senior Portfolio Manager at Employees Retirement System (ERS) of Texas, on our “Behind the Markets” podcast.
Reynolds has a unique worldview, as he is responsible for the international public equities team at ERS Texas, a $30 billion pension fund.
ERS Texas manages about 70% of public equities in-house with a philosophy that provides “core-like” exposure to markets, rooted in bottom-up research for companies that deliver strong revenue and earnings power.
Reynolds’ team currently believes that international equities are priced to deliver better forward-looking returns than the U.S. market. He has been early to this allocation thus far, but he feels it’s even more true now, while the U.S. large-cap growth freight train continues to run.
Picking Winners Is as Important as Avoiding Losers
Reynolds believes what you don’t do in investing is just as important as what you do.
After discussing this philosophy with Reynolds over five years ago, WisdomTree was motivated to research the impact of state-owned enterprises (SOEs) on emerging market strategies. SOEs tend to be slower-growth banks and energy companies with a prevalent government influence, while non-SOEs tend to be more independent technology and consumer-oriented companies.
There is now approximately $1.2 billion allocated to funds that track indexes that exclude SOEs, and WisdomTree has Reynolds to thank for our initial work around this concept.
Reynolds first became interested in SOEs when he read a Wall Street Journal article showing how Exxon Mobil had $400 billion in revenue with 75,000 global employees while Petro China had the same amount of revenue with 544,000 employees. This was a sign to Reynolds that state-owned companies could pursue interests beyond just maximizing returns for shareholders like him in Austin, Texas.
Reynolds believes environmental, social and governance (ESG) investing is a trend that is here to stay, and removing SOEs is one way to improve the governance component. I would add that ex-SOE strategies also indirectly reflect the “E” in ESG due to the removal of many large state-owned energy companies.
Reynolds also likes being active in emerging markets, and removing SOEs is a way to get deliberate (systematic) and active tilts without eliminating stocks individually from a vast universe.
This was a great conversation with an investor whose direct feedback spawned an important new generation of strategies more than five years ago.
Please listen to our full conversation with Timothy Reynolds below.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.