The Eaton Vance Parametric Tx-Mgd Em Mkts 1 (EITEX, quote) is an emerging markets mutual fund rated five star by Morningstar with an impressive average annualized return of 9.92% (over three years).
The Brazilian National Congress, Brasilia
EITEX has an expense ratio of 0.95% – the lowest expense ratio of the 16 funds ranked five star by Morningstar.
According to the prospectus, the annualized return in 2008 was -51.01%, 68.20% in 2009, 23.34% in 2010 and -18.05% in 2011. Of these years it outperformed the iShares MSCI Emerging Markets Index (EEM, quote) all years except 2009. The annualized return for the fund since inception in 1998 is 11.85 %, which is after taxes on distributions and sale of fund shares have been deducted.
EITEX has close to $2.78 billion dollars invested and currently owns 1,585 stocks. As of 3/31/12 the top ten holdings and their respective percentage of the fund’s net assets were:
America Movil S.A.B. de C.V. 1.60
Samsung Electronics Co. Ltd 1.19
Gazprom OAO ADS 1.09
China Mobile Ltd. 1.02
MTN Group Ltd. 0.96
Sberbank of Russia OJSC 0.82
Taiwan Semiconductor Manufacturing Co. Ltd. 0.65
Cez A.S. 0.60
OTP Bank Nyrt. 0.58
Grupo Financiero Banorte S.A.B. de C.V. 0.58
Jeff Brown, institutional Portfolio manager of EITEX and a registered rep for Eaton Vance, says EITEX applies a rule based strategy that looks at emerging markets in a different way than many other advisors. No fundamental research is done for the fund. This means that balance sheets or currency flows are not looked at and the value of individual companies is not assessed.
Brown says EITEX’ strategy is to step away from the largest weights in the emerging markets index. Instead more emphasis is put on small countries and frontier countries are included, which creates a more equally weighted platform. He says this kind of exposure to emerging markets make more sense, based on the fact that its benchmarks are very concentrated: it has 70%+ weight in a handful of countries.
Most people go into emerging markets for correlation and diversification benefits. If your money is invested in that few countries you fail in both of those themes, says Brown. This led EITEX to apply the strategy of equal weighting in the early 90’s.
Including countries that aren’t in the emerging markets index helps EITEX deal with volatility. Brown believes what happens in, for example, Tunisia doesn’t bleed across to affect Brazil, which doesn’t affect what happens in Latvia. This gives EITEX assets that balance each other out and most likely aren’t going in the same direction at the same time, which keeps volatility in control.
EITEX places countries in four different tiers based upon their liquidity, size and free flow. Every country in the same tier has equal weight. Tier 1 consists of Brazil, China, India, Mexico, Russia, South Africa, South Korea and Taiwan, while tier 4 contains the frontier countries.
As part of risk management EITEX has rebalancing rules in place. If a country gets too far over its target weight, the proceeds are redeployed in places where the fund currently is underweight. If EITEX’s holdings in, for example, Brazil go past 9%, it would be pulled back to its target weight of 6%. Brown says these rebalancing rules pushes human emotions and greed off the table.
EITEX is a top down fund where the weights of different countries are first determined. Then individual securities are bought in different economic sectors in the respective countries. It’s important to note that these securities are not bought to be alpha generators, instead that comes from the fund’s structure of reweighting and rebalancing.
Brown says that due to EITEX’s broad diversification with over 40+ countries in its portfolio, using the fund as a core allocation in combination with active managers makes a lot of sense and is what many of his clients do.