We believe some of the most compelling investment opportunities are in companies that benefit from long-duration, secular growth trends. Getting exposure to these opportunities, however, can be challenging. In fact, many mainstream core international and emerging markets benchmarks have relatively small positions in secular growth companies.
The MSCI ACWI ex U.S. Index has less exposure to secular growth than the Russell 1000 Value Index (Figure 1). This is reflected in its large weights to cyclical sectors—financials, energy, materials, and industrials. The ACWI ex U.S. Index’s weights to secular growth sectors, on the other hand, total only 22%.
Secular growth sectors—such as technology, health care, and communication services—include many companies that use technology to build long-duration growth drivers and lasting competitive advantages. The internet services and infrastructure industry, for example, includes companies that help businesses build their online capabilities. These companies have enjoyed significant growth, but they comprise just 0.2% of the core international index.
Emerging markets core indices, such as the MSCI EM Index, are more balanced between value and growth (Figure 2). The index has a significant weight in technology and its top four holdings (Taiwan Semiconductor, Tencent, Alibaba, and Samsung) account for about 17% of the index’s market capitalization.
These companies, however, have established businesses and are mostly incumbent technology leaders in Asia. They do not offer the long-duration, accelerating growth potential we see in other up-and-coming investment opportunities. Nearly 5% of the index’s weight in technology is in hardware, where we see very little prospect for growth.
To seek passive or even broad-based exposure to emerging markets equities is to actively underweight some of the most dynamic and fastest-growing companies in the region.
Index sectors were grouped by Cyclical/Rate Sensitive, Defensive, and Secular Growth. Sectors with diverse holdings (consumer discretionary, communication services, and healthcare) were analyzed at the industry level, with each industry assigned to one of the three groups. Cyclical/Rate Sensitive includes financials, materials, communication services/diversified telecom services and wireless telecom services, energy, industrials, consumer discretionary (except internet and direct marketing), and textiles, apparel & luxury goods. Defensive includes real estate, consumer staples, health care/pharmaceuticals, and utilities. Secular Growth includes information technology, health care (except pharmaceuticals), communication services/entertainment, interactive media and services, media, consumer discretionary/internet, and direct marketing.
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