Funds from Aberdeen and First State have dominated the IMA Global Emerging Markets and IMA Asia Pacific ex Japan sectors over the last decade. However, due to their huge popularity with investors many of them have grown substantially.
As a result, both groups have taken steps to “stem inflows” into some of the top performing vehicles, leaving new investors having to look for different ways to gain access to the developing world.
Evan-Cook, who heads up various funds of funds such as the top performing five crown rated Premier Multi Asset Distribution portfolio, says that he isn’t happy holding onto those funds because they are too big.
He says investors looking for an alternative should turn to Julian Mayo’s Charlemagne Emerging Markets Dividend fund.
“One fund we hold, which is the Charlemagne Magna Emerging Markets Dividend fund, focuses on quality and is still very much open for business,” Evan-Cook said.
“It has outperformed over recent years and I would say it is a viable alternative to the Aberdeen and First State funds as the manager focuses on top quality companies that have reliable earnings.”
Mayo launched his five crown rated fund in June 2010, with Mark Bickford-Smith joining him as co-manager in January 2012.
According to FE Analytics, since its launch the £135m Charlemagne Magna Emerging Markets Dividend fund is the sixth best-performing portfolio in the IMA Global Emerging Markets sector with returns of 17.84 per cent.
Performance of fund vs sector since June 2010
Source: FE Analytics
It also sits firmly in the top quartile over three years, though it has underperformed against the likes of First State Global Emerging Markets Sustainability, First State Global Emerging Markets Leaders and Aberdeen Global Emerging Markets Smaller Companies over those two time frames.
Charlemagne Magna Emerging Markets Dividend has a yield of 5.22 per cent and Mayo and Bickford-Smith locates that income from a portfolio which is heavily underweight the major emerging market economies such as China, India, Russia and Brazil.
Like the Aberdeen and First State funds, Mayo and Bickford-Smith’s portfolio has underperformed against the sector over the last 12 months.
Jonathan Pines, manager of the Hermes Asia ex Japan fund, recently told FE Trustnet that it comes as no surprise that funds that pay-up for quality have underperformed recently.
He says that as sentiment has turned increasingly negative towards the developing world, investors have been looking towards the so-called “safety” of companies that have a reliable earnings stream and pay a dividend.
He says this has caused a bubble in those areas of the market.
“I would be very cautious if I was an investor in an [Asian] income or yield fund. A lot of these valuations are sky-high and I would say that I’d be very surprised if income funds did not underperform the market as a whole over the next 10 years,” Pines said.
Evan-Cook agrees with Pines, however he says it will affect the likes of Aberdeen and First State because they are much larger, but as the Charlemagne fund is nimble enough to look right across the investable universe for quality, it has scope to outperform.
“Yes, I think there is a risk of that happening, especially in the largest constituents of the index which the likes of Aberdeen are now being forced to buy. It is something I completely agree with,” he said.
“That is why we hold the Charlemagne fund because it is smaller and therefore the manager has a greater degree of flexibility. He doesn’t have to buy the largest stocks in the index, but he is still investing in high-quality companies.”
Evan-Cook agrees with Pines’ assessment of the current market and holds his Hermes Asia ex Japan fund in his portfolio, as he likes the way the manager is willing to not follow the crowd into the overcrowded trades. Pines approach has worked so far, as well.
According to FE Analytics, since its launch in October 2012, it has been the best performing portfolio in the IMA Asia Pacific ex Japan sector with returns of 28.63 per cent. As a point of comparison, its MSCI Asia ex Japan IMI benchmark has returned 4.51 per cent.
Performance of fund vs sector and index since Oct 2012
Source: FE Analytics
It has also been the best performing portfolio over the last 12 months. Pines’ fund currently has a weighty exposure to cyclical stocks and North Asia, two parts of the market he feels haven’t been artificially inflated by the “wall of money” that is looking for income and therefore should continue to outperform.
However, instead of choosing on or the other, Evan-Cook holds both Charlemagne Magna Emerging Markets Dividend and Hermes Asia ex Japan as he sees them as a perfect combination.
He says that if investors are looking for access to emerging markets, then using a blended approach of the two portfolios is a very good strategy.
“They are both excellent managers and the fact that Jonathan Pines is willing to dip down the quality spectrum, because that is where he sees the best value, is a very sensible strategy.”
“However, also running that quality bias alongside it with Charlemagne fund is also useful because it isn’t overly exposed to areas of the market that could be worst hit if markets were to sell off.
Evan-Cook added: “There is a clear argument for holding them both, and that’s why we are running them together in our portfolios.”
The Charlemagne fund’s total expense ratio is 1.55 per cent while the Hermes fund’s ongoing charges figure is 0.89 per cent, according to Trustnet Direct.
