Scott is also tipping the closed-ended Geiger Counter trust for commodities exposure.
Emerging market equities have massively underperformed against the likes of the US, Europe and UK over the last three years.
Performance of indices over 3yrs
Source: FE Analytics
While the majority of fund managers are bullish on the developing world’s long-term growth story, they warn that emerging market equities may not have bottomed out yet as there are still concerns about the Fed’s QE tapering, an economic slowdown and geo-political risk in areas such as Ukraine.
Scott agrees that the short-term outlook is uncertain, but while he has been de-risking his developed world equity exposure, he says that now is the right time to be steadily re-establishing emerging markets and commodities positions.
“We are now in a situation where the areas that have the best long-term opportunities, such as commodity related equities and emerging market equities, are becoming more and more attractively valued,” Scott said.
“What we have been doing is gradually building up our exposure while still trying to keep a margin of safety.”
Because of that, Scott is building up a position in Mark Vincent’s Standard Life Global Emerging Markets Equity Income fund, which has a yield of 2.9 per cent.
“We have done well by having some frontier market funds and while we continue to hold them, we have been reducing our holding and have been building up more mainstream emerging markets exposure.”
“We have been using the Standard Life Global Emerging Markets Income fund. It is run by a good manager and is offering a decent yield.”
“As long as the manager is confident that he won’t have to cut the dividend, then you are essentially being paid while you wait for a capital return.”
“While emerging markets are very attractive over the long-term, with continuing fears about the slowdown in China and the crisis in Ukraine, I think this is a very sensible fund to use.”
The manager says that he is building up his exposure gradually and he recommends investors drip-feed into the fund.
“We haven’t gone plunging in,” he said. “However, having made the portfolio more defensive [in terms of its developed market exposure], we have been introducing some of the higher beta names in the areas that have been hit very hard.”
The £285.7m Standard Life Global Emerging Markets Equity Income fund was launched in December 2012.
FE Analytics data shows Vincent’s fund has been the third best performing portfolio in the IMA Global Emerging Markets sector over that time, with returns of 2.99 per cent. The average fund has lost 8.4 per cent.
Performance of fund vs sector since Dec 2012
Source: FE Analytics
FE Trustnet recently pointed out that a number of recently launched emerging markets and Asia Pacific ex Japan income funds have got off to a good start, such as Liontrust Asia Income, Polar Capital Emerging Markets Income and UBS Emerging Markets Income.
However, Scott chose the Standard Life vehicle because of the group’s approach to equity investment.
He already holds Thomas Moore’s top-performing Standard Life UK Equity Income Unconstrained fund and he expects Vincent’s portfolio to be equally profitable.
“I’m really quite excited about the potential of Standard Life equity funds,” he said. “They have all the aspects of strong capital discipline, a good team and risk controls you would associate with a group that has a fund as big and popular as GARS.”
“However, they have an entrepreneurial culture and relatively small sized equity funds which give them the flexibility to outperform.”
“It is a really attractive combination and I would be really surprised if in five years’ time those funds weren’t much bigger,” he added.
The Standard Life Global Emerging Markets Equity Income fund has clean share class ongoing charges of 0.99 per cent and is available on Trustnet Direct.
Scott has also been buying commodities funds.
The manager had owned Evy Hambro’s BlackRock World Mining IT because it was trading on a wide discount and was also offering a decent yield. However, that discount has narrowed and so he has replaced it with the Geiger Counter trust.
“It is a closed-ended commodity fund,” he said.
“He focuses on the nuclear/uranium industry, which is an example of commodity markets in a heightened form. We had sold in 2010 when the shares were at 70p and it went all the way up to 130p after that.”
“However, we started rebuilding a position last year after it had fallen below 30p. We bought even more on the back of the news that Japan will be re-starting some of its nuclear plants, which should be a catalyst for the industry’s fortunes to change.”
“There has been a decent recovery in the share price, but it is still a long way off 130p,” he added.
The Jersey-domiciled Geiger Counter trust is managed by Ian Francis, John Wong, Will Smith and Rob Crayfourd.
Our data shows that if investors had bought shares in the closed-ended fund when it was launched in May 2008, they would currently be sitting on a loss of 62.59 per cent.
Performance of trust since May 2008
Source: FE Analytics
However, its performance has picked up substantially recently and it has returned 20 per cent over six months.
Geiger Counter is currently trading on a 10 per cent discount to NAV, which is tighter than its one-year average.
Its discount has been as low as 5 per cent at times over the past 12 months, according to the AIC. Its ongoing charges are 3 cent and it isn’t currently geared.
Scott has managed his PFS Hawksmoor Distribution and Vanbrugh funds since their launch in February 2009 and April 2012, respectively.
Both portfolios are top-quartile performers in their respective sectors over this time.
