Multinational affiliates better for investors – Aberdeen and Yale study

A study commissioned by Aberdeen Asset Management from Yale University’s Martijn Cremers indicates that locally listed affiliates of multinational firms have an edge.

Cremers, Associate Professor of Finance at Yale School of Management,found the share price performance of listed affiliates was vastly better than that of both emerging and developed markets broadly as well as their own local markets.

“Publicly-traded emerging market affiliates of large multinational corporations have shown remarkably good performance over the last 14 years,” he noted. “These affiliates combined high performance with lower volatility, outperforming both their local market and the wider emerging markets, but not at the expense of significant greater down-side volatility.

“The two main reasons for this outperformance are improved corporate governance and a stabilizing role of the parent companies. Both seem critical specifically in financial crises. These give affiliates a clear comparative advantage over their local competitors that should endure in the foreseeable future.”

There are 92 such companies across the emerging world, including , for example, Unilever plc, which has listed affiliates in India, Indonesia and Pakistan in which it has stakes of 37%, 85% and 75% respectively.

Over the 13 years from June 1998 to June 2011, a period chosen for its balance between sample size and history length, the listed affiliates returned 2,229%. This compared with total returns of parents, local markets and parents’ markets of 407%, 1,157% and 147% respectively.

This pattern of outperformance was also consistent across each region. Affiliates in Latin America, Europe, Middle east and Africa (EMEA) and Asia outperformed their local indices by 41%, 134% and 50% respectively. Adjusted for volatility the affiliates’ performance was even better, as many of them demonstrated defensive qualities during the 2008/9 financial crisis.

These findings contradict the perceived wisdom of those who argue that the most effective way for investors to obtain exposure to emerging markets is through developed market companies.

Since active managers in the emerging world generally underperform, the argument goes, why not buy a multinationals ETF? The answer, according to the study, is that investors would miss an opportunity to earn great returns from some emerging markets companies.

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