Empirical recently introduced several new equity portfolio options.* We refer to the different equity portfolios as Targeted Premium Model Portfolios 1 through 5. As shown in Figure 1, the five different models are differentiated by their varying exposures to aggressive asset classes (asset classes that carry more risk, yet offer the opportunity for higher expected returns). For example, Portfolio 5 has a large weighting to small cap, value and emerging markets equities relative to Portfolio 1.
In previous communications, we covered the research surrounding small and value return premiums. In this letter, we continue the discussion on targeted return premiums with a focus on emerging markets. Emerging markets performance data goes back to 1988. Since then, the MSCI Emerging Markets Index has generated a 13.19% annual return, beating the 6.54% return produced by the MSCI World Index, through July 2010, making this a return premium worth examining.