In a recent TMX VettaFi Midyear Symposium, a trend that emerged was a significant shift in investor sentiment. While much of the year has been focused on U.S. mega-cap tech concentration, a live audience poll revealed that emerging market (EM) equities are commanding strong interest from investors looking to add a touch of diversification to their portfolios.
Navigating EM, however, comes with distinct geopolitical and economic ramifications to consider. To address this, Benjamin Treacy, institutional portfolio manager at Fidelity Investments, emphasized the necessity of an active approach rather than a traditional market-cap-weighted index strategy.
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FFEM: An Active Approach to EM
Fidelity applies this actively managed mandate to the Fidelity Fundamental Emerging Markets ETF (FFEM). The fund seeks long-term capital growth by investing in EM securities, depositary receipts, and related derivatives.
FFEM defines EM using MSCI and World Bank criteria, evaluating issuer domiciles, assets, and revenues. Its unique investment process starts with rigorous fundamental analyst research and FMR reference portfolios. The investment team then applies a quantitative portfolio construction process to emphasize high-conviction securities as well as to manage risk and liquidity across various EM countries.
“In emerging markets, we have a dedicated emerging markets portfolio management and research teams” Treacy said. “We draw upon the insights from five different emerging market experts at our firm. We look across their strategies and we try to pick the highest conviction ideas that they have and run this in an active approach.”
Active Flexibility Amid Volatility
Active managers have the autonomy to adjust the portfolio to suit current market conditions. That said, according to Treacy, the bottom-up stock picking strategy is essential as “the index-level overall performance isn’t everything.”
In volatile international landscapes, Fidelity’s active managers retain the flexibility to realize gains on overvalued names while also rotating capital into underappreciated growth opportunities before the broader market catches on. By leveraging the collective wisdom of Fidelity’s portfolio managers, vehicles like FFEM aim to give investors a smoother ride and access to the high-conviction ideas within the EM space.
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Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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