Sentiment towards the emerging markets has turned increasingly negative recently as concerns about slowing growth, the Fed’s QE tapering, falling commodity prices, weakening currencies and current account deficits have meant the sector has underperformed against its developed market rivals.
However, the majority of industry experts say that the long-term growth outlook for the developing world is still strong. Fund of funds managers clearly agree, with a huge number of them holding funds from the IMA Global Emerging Markets and Asia Pacific ex-UK sectors in their top 10.
Source: FE Analytics
First State Asia Pacific Leaders, co-managed by Alistair Thompson and FE Alpha Manager Angus Tulloch, is the standout favourite, with 46 funds of funds holding it in their top 10.
Our data shows that two of those are the highly rated Jupiter Merlin Growth Portfolio and the Jupiter Merlin Worldwide Portfolio, both of which are headed up the FE Alpha Manager trio of John Chatfeild-Roberts, Algy Smith-Maxwell and Peter Lawery.
Former FE Alpha Manager Toby Ricketts also holds First State Asia Pacific Leaders across a variety of his Margetts funds.
First State decided to stem inflows into the now £6.2bn fund last year, meaning a fund of funds may represent a new investor's best bet to gain exposure to it.
It isn’t difficult to see why Tulloch and Thompson’s fund is such a firm favourite.
According to FE Analytics, First State Asia Pacific Leaders is the second-best performing portfolio in the IMA Asia Pacific ex Japan sector over 10 years, with returns of 273.69 per cent, beating its benchmark – the MSCI AC Asia Pacific ex Japan index – by close to 90 percentage points.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is also a top-quartile performer for its alpha generation relative to its benchmark, its information ratio and its Sharpe ratio over that time as well. In addition, it is one of the sector’s best performers in terms of its maximum drawdown, annualised volatility and downside risk.
Its performance has, however, dropped off since the period after the financial crash.
While it boasts top-quartile returns over three years, it has underperformed against its sector and benchmark over one and five years.
First State Global Emerging Markets Leaders also features on the list, though only nine funds of funds hold it in their top-10.
While First State’s flagship Asia Pacific fund is more popular than Aberdeen’s, which is its main rival in the region (Aberdeen Asia Pacific Equity is a top-10 holding with 11 funds of funds), the latter’s main emerging markets fund is the preferred choice with multi-managers in the IMA Global Emerging Markets sector.
The £2.3bn Aberdeen Emerging Markets fund ranks second on the list, with 27 multi-managers holding it in their top-10.
One of the major surprises of the study was the popularity of passively managed emerging markets funds, with three of them featuring at the top end of the list.
FE Trustnet recently showed that many single-country emerging markets funds have struggled to beat trackers in recent years, and active managers seem keen on passives for broad exposure, too.
One of these is the BlackRock CIF Emerging Markets Equity Tracker, which crops up in 31 funds' top-10 holdings. The multi-managers at the Standard Life Myfolio, Architas MA and Aviva Multi Asset fund ranges all have decent exposure to the tracker.
The BlackRock CIF Pacific ex Japan Equity Tracker fund and Vanguard Emerging Markets Stock Index also feature on the list.
While the passive route has been the most effective in the Asia Pacific ex Japan sector – the BlackRock CIF Pacific ex Japan Equity Tracker has outperformed the sector over three years – the two emerging markets index funds have fallen further than the sector over that time.
However, Toby Ricketts recently told FE Trustnet that using passive funds for emerging markets exposure is unwise, as he expects the index as a whole to struggle due to its high weighting to commodity stocks.
Newton Asian Income is also popular with fund of funds managers. Our data shows that 15 of them count the five crown-rated portfolio as a top-10 holding.
Jason Pidcock's £4bn fund is the second-best performer in its sector over five years, with returns of 145.05 per cent, beating its FTSE Asia Pacific ex Japan benchmark by 45 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, as FE Trustnet recently highlighted, the fund underperformed last year and Pidcock says that one of the major reasons for this slump was because a lot of hot money came out from his investable universe.
The fund is yielding more than 5 per cent.
Schroder Asian Income and Fidelity South East Asia are also popular and both feature on the list.
