As emerging markets (EM) continue to grow in complexity and diversity, investors face a persistent challenge: how to capture their long-term growth potential while navigating structural inefficiencies and volatility across such a broad opportunity set.
In response, systematic approaches can analyse this vast landscape while maintaining disciplined portfolio construction.
For Acadian Asset Management, systematic investing has always been central to its philosophy. Coupled with more than 30 years’ experience in EM equities, the firm’s approach blends behavioural finance insights, advanced technology and disciplined portfolio construction.
Harnessing inefficiencies at scale
The EM universe today sits in stark contrast to when Acadian launched its first portfolio in 1994, with the asset class in its infancy. Just over three decades on, the firm now counts roughly 18,000 companies across 24 countries on its investment radar.
Yet Acadian’s philosophy remains grounded in the principles of behavioural finance. And EM offer fertile ground for identifying and exploiting investor over- and under-reactions to information – with inefficiencies typically amplified amid fragmented information flows and diverse investor bases, systematic strategies can thrive.
“Over the past decade, we have observed higher but more volatile payoffs in EM, where financial exchanges have been evolving, resulting in mispricings that our systematic process can readily exploit,” said Francis Seah, senior vice president, portfolio manager and managing director at Acadian Singapore.
Improvements in data coverage, more thorough financial reporting and advances in computing power have combined to further enhance the potential for this style of investing in a scalable way, he said. “The larger the universe, the better the odds of finding great companies to hold in our client portfolios.”
The firm’s platform is built for this – to process large datasets in near real-time, and incorporating new information continuously. This technological capability enables the strategy to scale across thousands of securities while systematically identifying inefficiencies that may otherwise be overlooked.
Multi-factor forecasting, for example, enables the firm to assess stocks, industries and geographic areas simultaneously, with varying factor weights depending on country and sector dynamics, reflecting historical effectiveness across different environments.
A core approach without bias
Despite the complexity of the models underlying the process, Acadian describes itself as a core EM manager. Its aim is not to express a single style view, but to capture alpha through balanced exposure to multiple complementary factors – something, in practice, which can lead to more resilient performance across market cycles.
To drive this, Acadian refines signals and builds increasingly nuanced models to capture a broader range of return drivers.
According to Seah (pictured), signals are grouped into four areas: first, value, assessing relative valuations; second, growth, capturing earnings dynamics and forward expectations; third, quality, evaluating balance sheet strength and operational efficiency; and fourth, technical, incorporating price and trading trends.
Based on the combined return forecasts across countries, industries and stocks, the portfolio construction process then integrates expected returns with risk and transaction cost forecasts in a disciplined optimisation framework.
Breadth is another defining feature of the strategy. “The EM investable universe now rivals developed markets in size,” said Seah. “And while EM benchmarks have become increasingly concentrated and driven by a handful of dominant stocks, Acadian’s approach is built on broad, systematic diversification.”
For example, the strategy typically allocates across hundreds of stocks, allowing portfolios to access under-researched companies across sectors such as semiconductors, technology and industrials, while mitigating concentration risk.
Informational advantages in local markets
Systematic investing can also provide an edge in markets where local dynamics significantly differ from global drivers.
China’s A-share market is a case in point. Using its 25 years-plus of experience in Chinese equities and direct access to the domestic market through an RQFII licence, Acadian incorporates market-specific signals into its models, ranging from adjustments for state-owned enterprise ownership structures, to signals designed to capture retail-driven behavioural patterns in the market.
Natural language processing techniques are also applied to Chinese corporate filings and investor disclosures, while local-language expertise validates and refines datasets.
Discipline, risk control and evolution
Perhaps one of the defining strengths of systematic investing lies in its discipline.
For Acadian, rather than relying on static constraints, the strategy continually updates risk and return forecasts as market conditions evolve. This dynamic framework allows the portfolio to adjust exposures in response to new information while maintaining consistent governance and oversight.
At the same time, the investment team maintains a strong focus on research and innovation, with efforts to identify new signals, incorporate alternative data and refine modelling techniques essential to keeping the strategy relevant as EM continue to develop.
“This combination of systematic implementation, consistent governance and continual research allows the strategy to remain disciplined through periods of volatility while still adapting to new information,” said Seah.
Building resilient EM exposure
Volatility is a key characteristic of EM. However, these markets also offer long-term investors significant growth potential. For Acadian, a systematic approach is a way to harness this with a diversified allocation, disciplined risk management and continuous research.