In a previous blog post we discussed the characteristics of emerging market state-owned enterprises and the growing interest that some investors have expressed in avoiding or limiting their exposures. State-owned enterprises are typically defined as companies that are either wholly or partially owned or operated by a government. Some investors believe that government ownership can negatively impact the operational aspects of a company because government-owned companies might be influenced by a broader set of interests, beyond generating profits for shareholders.
The Economist magazine ran an article that sums up the bottom-line concern for investors: “The performance of state-owned enterprises has been shockingly bad.”1 In the words of the Economist article:
Ronald Reagan said the nine most terrifying words in the English language were “I’m from the government and I’m here to help.” For investors the scariest words may be, “I’m from a state-owned firm and I want your capital.” Across the world, big, listed state-owned enterprises (SOEs) that were floated, or raised mountains of equity, between 2000 and 2010 have had a dismal time. Their share of global market capitalisation has shrunk from a peak of 22% in 2007 to 13% today.
To be fair, there are certainly price levels at which these state-owned companies can become very cheap, and all the bad news can become reflected in the prices such that they perform very well going forward. But given the dominance of many emerging market indexes in state-run companies (as much as 25% to 30% of popular benchmarks), WisdomTree thought it prudent to offer an alternative view of the emerging markets—without state-run companies.
Therefore, we introduce our new Index, the WisdomTree Emerging Markets ex-State-Owned Enterprises (EMXSOE), which is designed to measure the performance of broad-based emerging market stocks that exclude state-owned companies. To WisdomTree, state-owned enterprises are defined as those having government ownership of more than 20% of outstanding shares.
The Index employs a modified float-adjusted market-capitalization weighting process to target the weights of countries in the universe prior to the removal of state-owned enterprises while also limiting sector deviations to 3% of the starting universe float-adjusted market. The application of this rule is intended to provide a type of beta exposure that targets the initial universe from a country perspective, once the state-owned companies have been removed.
Eligible Universes: Must be incorporated or domiciled and have their shares listed on exchanges in one of the following countries: Brazil, Chile, China, Czech Republic, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand or Turkey2
State-Owned Enterprises: Companies with more than 20% ownership by government body are excluded
Minimum Market Capitalization: $1.0 billion
Weighting: Modified float-adjusted market capitalization