Brazilian oil giant Petrobras once again finds itself at the center of controversy, reminding investors that avoiding state-owned enterprises (SOEs) is often a winning strategy.
Advisors can meet that demand with model portfolios, including the Emerging Markets Multi-Factor Portfolio.
“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of Emerging Market equities primarily using factor focused ETFs. The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETF,” according to WisdomTree.
When it comes to avoiding SOEs, this model portfolio has the goods. The recent decision to replace Petrobras CEO Roberto Castello Branco proves much.
“The market’s immediate reaction to the replacement of Castello Branco—a University of Chicago-educated economist—with former military general Joaquim Silva e Luna was not favorable,” writes Alejandro Saltiel, WisdomTree associate director of modern alpha. “Shares of Petrobras fell more than 25% from Friday’s opening prices. The rest of the Brazilian equity market, which is tracked by the Ibovespa Index, also suffered losses, with other state-owned companies joining Petrobras on the way down.”
This Portfolio Shuns SOEs
Emerging markets equities are now turning higher, and many market participants are bullish on the prospects for the asset class to start 2021. Ongoing positive sentiment in emerging markets as an asset class has attracted greater attention among investors. Moreover, given the extended low-rate environment, many income seekers are turning to alternative sources of yield.
This model portfolio takes steps to avoid SOE exposure.
“In 2014, WisdomTree launched the WisdomTree Emerging Market ex-State-Owned Enterprises Index (EMXSOE) which removes companies with significant government participation from its investable universe. Removing these companies has improved the Index’s growth, profitability and ESG metrics compared to the broad MSCI EM Index,” notes Saltiel. “Importantly, it aims to side-step the risk of owning state-owned companies that can experience a situation like the one we are seeing transpire with Petrobras.”
Data confirm that long-term investors can get on the right side of the emerging markets trade by avoiding state-owned firms.
“Excluding SOEs has also been a significant driver of excess performance since EMXSOE’s inception, resulting in 377 basis points (bps) of annualized outperformance versus the MSCI EM Index. During this period, SOEs in the MSCI EM Index have underperformed non-SOEs by 750 bps and have been a negative contributor to performance,” concludes Saltiel.
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