The two groups have dominated the IMA Global Emerging Markets and IMA Asia Pacific ex Japan sectors over the past decade, with their funds swamping the top decile over three, five, seven and 10 years.
However, a number of the best-known funds such as Aberdeen Emerging Markets, Aberdeen Asian Smaller Companies, First State Asia Pacific Leaders and First State Global Emerging Markets Leaders have been closed or are close to capacity.
Investors already in these funds have also been left frustrated, with three of the four mentioned above, the exception being First State Global Emerging Markets Leaders, failing to beat their sector over the last year.
“I think it is very clear that we need an alternative,” said Rowan Dartington’s Tim Cockerill.
One group that is starting to emerge as a contender to First State and Aberdeen is Hermes Fund Managers.
According to FE Analytics, in 2013 the Hermes Asia ex Japan fund was the top performing portfolio in the IMA Asia Pacific ex Japan sector while the Hermes Global Emerging Markets fund was the second best performer in the IMA Global Emerging Markets sector.
Performance of funds vs sectors in 2013
Source: FE Analytics
Hermes' Asia ex Japan offering was only launched in October 2012. Its Global Emerging Markets fund is a top-quartile performer over three years, although it falls into the second quartile over five.
Cockerill, who also sits on the AFI panel, recently tipped Hermes as a fund group to watch out for in the future.
However, he says that although the recent performance of the Hermes Global Emerging Markets and Hermes Asia ex Japan funds is encouraging, a longer track record is needed before further judgment is passed.
Cockerill says that his analysis suggests that First State is still the leading light in the emerging markets sectors over three years; however, given that the majority of its funds are at or near capacity, he feels that now could be the time to take a closer look at Hermes.
Performance of funds over 3yrs
Source: FE Analytics
“First State is still quite ahead, however Hermes have the edge over the shorter term as they have been more in tune with what has been going on in the market.”
“I’m still a fan of funds that have a good process which is repeatable, something I think Aberdeen and First State have,” Cockerill said.
“If Hermes is in the same camp, then that’s going to be interesting. The numbers I see don’t quite show that yet, but they are certainly one to have on your watch list.”
As Cockerill points out, the majority of Hermes Global Emerging Markets’ returns have come about over the last 12 months or so.
Although it was the second-best performer in the sector last year, it has not been a top-quartile performer in any other calendar year since its launch and was a bottom-quartile performer in 2010 and 2012.
Source: FE Analytics
Manager Gary Greenberg says the main reason for these bouts of underperformance is because he was unwilling to jump into safer, more defensive stocks as he felt they were overvalued.
The manager says that this call was one of the primary reasons why he outperformed last year.
“Our performance has been driven by stock selection more than anything. However, we had a big overweight in the consumer discretionary sector,” Greenberg explained.
“After the financial crash, everyone went into consumer staples for safety and bid up the price. That has meant they are now trading on very high multiples of 20 to 30 times.”
“Just like the 'nifty fifty' in the US, these were companies that were always going to be great and people would pay anything for them. Similarly, that’s what has happened in the emerging markets.”
“The way I see it is that if you have the confidence that people are going to go out and keep buying food and drinks, then you also have the confidence that they will go out for dinner every so often, buy a car or go on holiday,” he added.
Aberdeen Emerging Markets' lead manager Devan Kaloo says the reason for the fund's recent underperformance is in part because its defensive holdings with reliable earnings have been sluggish.
The majority of yield-hunting funds, such as Newton Asian Income, Schroder Asian Income and Somerset Emerging Markets Dividend Growth also underperformed at the back end of last year.
Jonathan Pines, manager of Hermes Asia ex Japan, recently told FE Trustnet that other funds in his sector had been making the mistake of swamping companies with cash-heavy balance sheets, reliable earnings and a decent dividend.
He says this is one of the major reasons why some of his more established competitors have underperformed.
"Some [managers] are making a big mistake, as though they are buying quality companies, they are buying them at an extraordinary price," Pines said.
Cockerill says that although the jury is still out on whether Hermes is a viable alternative to the highly successful Aberdeen and First State funds, the fact that it has been avoiding the overvalued areas of the market is promising.
“Having met, spoken with and listened to lots of fund managers, it is clear that what you don’t own is just as important as what you do own. The question is whether that performance is repeatable.”
“What I know from the other Hermes funds I have seen is that they have been able to do that and aim for it in the future. Certainly, their emerging markets funds are funds that I will have to take a closer look at,” Cockerill added.
At this point in time, both of the Hermes Global Emerging Markets and Asia ex Japan funds are primarily geared towards institutional investors. However, retail investors can buy them on fund platforms such as Interactive Investor and Novia.