Insights | 01 August 2019

EM Illiquid Is Not the Same as EM Small Cap – And That’s a Good Thing!

Authors

Binu George

Mr. George is an emerging markets equity portfolio strategist, who was previously a member of GMO’s Systematic Equity and Emerging Markets Select Equity teams. Prior to joining GMO in 2009, he was a portfolio manager with AXA Rosenberg. Previously, Mr. George worked in several roles encompassing research and investment strategy at Barclays Global Investors. Mr. George earned his BTech in Civil Engineering from Indian Institute of Technology, Madras and his MBA in Finance from the University of Rochester. He is a CFA charterholder.

Summary

Small cap stocks within emerging markets have outperformed large cap stocks (i.e., MSCI EM) by around 0.5% annualized since January 2000. However, Illiquid stocks (regardless of capitalization) have outperformed large cap stocks by around 3%. This illiquidity premium is related to, but not the same as, the small cap premium. This opportunity is all the more enticing as it sits atop emerging markets, an already attractive asset class, and offers active managers a large selection universe of approximately 2000 firms.

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