Swathes of BRIC (Brazil, Russia, India and China) funds were launched to great fanfare prior to the financial crash as asset management groups tried to take advantage of the rising demand for emerging market equities.
However, various macro headwinds have caused sentiment to turn increasingly negative towards those parts of the world and our data shows that the large majority of the funds have failed to protect their investors in this tough period.
According to FE Analytics, only 28.5 per cent of the 28 funds that are benchmarked against the MSCI China, MSCI Golden Dragon, MSCI Zhong Hua and MSCI China 10/40 indices have outperformed over three years.
Performance of composite portfolios over 3yrs
Source: FE Analytics
Henderson Horizon China, Templeton China and Aberdeen Global Chinese Equity are among the names that have underperformed over a three-year period.
The figures are even more striking with Russian and Brazilian funds: none of the nine Russia and Brazil specialist portfolios have been able to outperform their relevant MSCI indices over that time.
Country-specific India funds have fared better, however. Our data shows that there are 12 India-focused funds that use either the MSCI India or MSCI India 10/40 indices as a benchmark and seven of them, including Aberdeen Global Indian Equity, First State Indian Subcontinent and JPM India, have outperformed over three years.
A recent FE Trustnet article highlighted how actively managed UK funds have added value and outperformed over the past few years, suggesting that managers have a better chance of beating the index in the domestic market.
However, our study suggests that a tracker fund or an ETF would have been a better bet in these specific markets over three years.
The performance of the IMA’s country-specific BRIC funds looks a lot different over a five-year period.
Our data shows that while only 21.6 per cent of those funds managed to beat their MSCI benchmark over three years, 65 per cent of them have outperformed over the last half a decade.
Every Brazil fund has beaten its MSCI benchmark over that time, while 55 per cent of China and 60 per cent of Russia funds have also outperformed. Again, India-focused funds have been the exception to the rule, as only 45 per cent of the ones with a five-track record have managed to beat the market.
Ben Whitmore, manager of the five crown-rated Jupiter UK Special Situations fund, says that active managers, at least in his sector, have a better chance of outperforming when the wider market is rising.
He says that it is no real surprise that more than 80 per cent of actively managed funds in the IMA UK All Companies sector beat the FTSE All Share in 2013.
He also points out that in a rally like the one seen last year, larger “lumbering” companies – which make up a higher proportion of the index – will tend to underperform against their medium-sized rivals.
Because active managers can stray away from the benchmark, they can move to overweight positions to capture more upside. However, Whitmore says this is the reason they can struggle to add value when the outlook is more difficult.
“Medium-sized companies will underperform when markets become more risk averse and so active managers tend to underperform during a falling market,” Whitmore said.
This may be one factor that has limited the single-country funds over the past three years, but there are other reasons that should mean that active managers outperform.
Ben Willis (pictured), head of research at Whitechurch, says it is important to examine how the relevant MSCI indices are made up.
He points to the fact the Brazilian market is dominated by large energy and mining stocks such as Vale and Petrobas – which have both had a difficult time recently. Willis says that he would expect actively managed funds to avoid such troublesome areas of the market and allocate to stocks that can perform better, but our study shows they haven’t necessarily been able to do this.
The study showed that the average China and Russia funds beat their relevant MSCI benchmark in 2009 and 2010.
Markets were rebounding after the financial crash during those years and bombed-out emerging markets stocks rose by a significant amount.
Source: FE Analytics
However, as the table above shows, those funds were hit harder than the market in 2011 and 2012 when concerns over slowing growth in the developing world deepened. They did, however, comfortably outperform the market in 2013.
The average composite of Brazil funds also failed to outperform the MSCI Brazil 10/40 index in the falling market of 2011.
India, again, has proven to be the exception to the rule as actively managed funds focused on the country have only underperformed against their MSCI benchmark in two of the last five calendar years – 2012 and when markets rebounded in 2009.
Willis recently told FE Trustnet that he was planning to switch his current broad-based emerging markets exposure to more country-specific or BRIC-only funds.
However, he says that in light of how these actively managed funds have fared and the current uncertain outlook, it is a very difficult call to make.
“At the moment, it’s like trying to catch a falling knife,” Willis said. “You think there may be some opportunities developing, but then you realise there are so many risks attached.”
“The outlook is so up in the air and of course emerging markets could well have another very difficult year.”
“The safe option would be to keep the broad-based exposure and maybe allocate a small proportion to the specialist funds.”
“Some people may now think it is a good time to take a punt and have a tactical play, but so much is now dictated by what the Fed and the Chinese economy do.”
“If you were going to buy and hold, then now may be a good entry point into those country-specific funds. However, you have to be taking at least a five-year view if that were the case,” he added.
For anyone looking to make that tactical play, the study shows that there are a number of funds that have been able to beat the market in both rising and falling markets.
According to FE Analytics, GAM Star China Equity and Threadneedle China Opportunities have both outperformed the MSCI China index over five and three years.
Performance of funds vs index over 3yrs
Source: FE Analytics
First State’s Greater China Growth and Indian Subcontinent funds have also outperformed over three and five years.
Outside of the BRIC nations, there aren’t many country-specific funds that focus on other emerging markets in the IMA universe. However, using FCA offshore portfolios, a very similar trend emerges.
FE Analytics data shows that the average Malaysia and Indonesia funds have failed to beat the MSCI Malaysia and MSCI Indonesia indices over three years, but have beaten the market over the last half a decade.
Thailand-focused funds have tended to outperform the MSCI Thailand index over both three and five years.
However, it is worth pointing out that the Thai market has fared much better than its Malaysian and Indonesian counterparts over those timeframes.
