GEM equity funds of funds management approach is structurally better than single GEM fund management from ESG perspective

In our view, a fund of funds approach to investing in global emerging market (GEM) equities is better than a single fund approach in terms of seeking the most benefit from integrating environmental, social & governance (ESG) considerations[1]. With a funds of funds management approach, there are normally more people involved in ESG integration and in engagement with investee companies. These teams are also generally more diverse than teams managing single GEM funds.

Size of investment team matters when it comes to ESG benefits

The difficult elements when it comes to embedding ESG considerations within equity portfolio management is integration and engagement. The more people there are in the investment team, the larger the impact can be:

  • To integrate ESG factors into the equity analysis, these factors need to be assessed for each company in the research universe. Most ESG factors are difficult to quantify precisely, so there is a need for people who can make qualitative assessments
  • To encourage investee companies to adopt better ESG practices also requires considerable resources. To be able to meet with companies and interact with other investors in the companies and related organisations takes time and people.

Fund of funds GEM equity investment teams are generally larger than GEM fund teams

Median[2] number in GEM fund investment teams is 30 vs. 59+ for GEM funds of funds teams[3].

Graph 1. Median number of people in GEM investment teams

Note: There is no data for some of the other large EM countries as we have not found data for them.
Sources: various asset management companies’ data for GEM or country-specific funds, Bloomberg, TKB Investment Partners, March 2021

Investment team diversity in GEM fund of funds setup is better than in that for GEM funds[4]

It is likely that in most GEM fund investment teams there is a sizable proportion of Chinese analysts/portfolio managers given the dominant share of China in the EM equity market.

For markets in smaller countries, this is unlikely to be the case, in our view. There are normally fewer than 10 Russian or Indonesia stocks in GEM fund portfolios[5]. It does not appear efficient to have a dedicated Russian or Indonesian analyst within a GEM fund investment team given the small number of stocks to cover.

Graph 2. Average number of stocks in GEM fund portfolios in country pockets

Note: Average number of stocks in a country pocket for GEM funds during January-October 2020. GEM fund list is the one we used in Stock picking in emerging markets: “eagles” or “foxes”?
Sources: Bloomberg, Morningstar, TKB Investment Partners, March 2021

In a fund of funds setup for a GEM equity strategy, any country market pocket is generally managed by a full-size investment team[6] and these teams are usually from different companies. This suggests that there is also better diversity in terms of corporate culture in a fund of funds setup. Finally, these teams are normally located in their respective countries: Indian equity team in India, Russian equity team in Russia, etc. Team location diversity is also better in a GEM fund of funds setup than in a single GEM equity fund management approach.


Authors: Egor Kiselev PhD, Head of International Business & Investment Marketing; Aleksandra Kuznetsova, Investment Specialist; Marina Tsutskiridze, Investment Specialist

[1] All other factors being equal: size of assets under management, ESG policies, etc.
[2] We used a median number to limit the impact of outliers which do not appear realistic (e.g. 100+ people for one GEM and one China fund)
[3] We assumed that there is one external asset management company for each EM country and that the number of people in each team is equal to the median number of people in the investment teams focused on a particular country. The actual number of people in the overall investment team of external managers for GEM fund of funds is likely to be higher as we failed to find data for some of the large countries. For Russia we used the number of people in TKB Investment Partners’ equity team.
[4] Diversity is part of the ESG social pillar, according to PWC article.
[5] For the GEM funds sub-sample, we used the same as in Stock picking in emerging markets: “eagles” or “foxes”?
[6] When the pocket is actively managed

GEM equity FoF approach vs GEM fund from ESG perspective March 2021
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