One of the biggest discussions this year has been about factors and different ways in which they can be accessed and used to build portfolios. Some approaches are crystal clear, with the goal of the factor in an index’s name—like quality, momentum, low volatility, value or size.
However, whether or not a strategy has a factor in its name is immaterial—every strategy that isn’t owning the ENTIRE market is tilting toward some factors and away from others.
Concept of Ex-State-Owned Enterprises Aligns with Quality Variables/Sectors
In the United States, the fact that publicly traded companies are meant to operate in the best interest of shareholders is pretty much a sacred truth. Venturing into emerging markets, one sees a large number of big companies that are listed on stock exchanges but that are also majority-owned by governments.
Governments may not always have the same interests as shareholders, namely maximizing profits. The fact of the matter: ANY broad-based strategy that invests in emerging markets today without a focus on avoiding government ownership will tend to invest alongside governments, as those firms are some of the largest by market capitalization in the asset class.
Return on Equity (ROE) & Return on Assets (ROA)
State ownership tends to come concentrated in sectors that are viewed as critical to the functioning of an economy; this can be in places like China (banks), Russia (energy firms), Brazil (energy and materials companies) and in many cases utility companies and telecom firms offering more basic services.
Where we see much less state ownership is among traditional consumer or technology companies.
What is interesting about these sector profiles is that they tilt toward higher “quality” sectors and away from “value” sectors. This also can be observed by the difference in both ROE and ROA for companies that are/are not state owned.
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