But while Cathie was selling, the indices were gathering
It ends up being this weird, convoluted cycle where the index ends up having heavy exposure to China - the fund issuers track that, managers track that, etc etc
Funds are thinking about how to solve this - BlackRock is thinking about separating China out as a stand-alone market, not part of EM or DM.
This will help with fund structure but it still doesn’t solve the ✨overexposure✨ issue.
There is
1. General overexposure: EM funds have massive exposure to China, mostly due to market cap weighting. ~VWO has 40% to China alone.
Intensive overexposure: broad EM funds are the biggest holders of $EDU. Not China-focused funds, not thematic education funds - broad EM funds
You might say - oh, I can just invest in an ESG fund and avoid the overexposure right?
EM ESG funds have the same exposure because of tracking error— they cannot deviate from the parent (non-ESG) benchmark by more than 1%.
So they end up with the same ✨overexposure✨ issue.
Zooming out here, this is a problem with fund structure-
The whole MSCI /China story and the global benchmarks inclusion is really interesting too.
The SEC has a paper on it - “more than 150 China-based companies with a combined market value of $1.2T were listed on US stock exchanges at the end of 2019.”
So the deal is that there is an overexposure to Chinese companies in the EM indexes, then an increasing exposure to them due to market cap weighting, resulting in funds having overexposure, resulting in asset managers having overexposure
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