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Dirt cheap emerging markets have hit bottom, says Spear

11 April 2014

FE Trustnet takes an in depth look at the IMA Global Emerging Markets sector, which has had a torrid time of late.

By Daniel Lanyon,

Reporter, FE Trustnet

Emerging markets have finally turned a corner, according to managing director of Spear Financial Chris Spear, who has started buying into the battered asset class for the first time in months.

ALT_TAG Fears of rising interest rates in the US and an end of quantitative easing, coupled with a slowdown in China, have been widely seen as the main drivers behind a severe sell-off of emerging market assets since May 2013.

The MSCI Emerging Market index has lost 10.95 per cent since mid-May 2013, FE Analytics shows, with the majority of funds in the IMA Global Emerging Markets sector losing more than this over the period.

Performance of index since market sell-off

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Source: FE Analytics

No funds in the sector have made money since the market sell-off started in May 2013.

However Spear (pictured) believes the worst of the market turbulence is over, and thinks the time for selling down exposure to funds in this area has passed. That said, he urges caution with regard to building exposure.

“In the last two weeks there seems to have been turnaround. There are still concerns for China and the Russia/Ukraine situation, but I think we’ve reached the bottom of the market,” he said.

“There is a lot of money around and it’s looking for a home. I’m advising investors not to do anymore selling out of global emerging market funds, and slowly tip-toe back in.”

“However, is it time to go wholesale into emerging markets? No.”

The £122.3m Standard Life Investments Global Emerging Markets Equity, run by Alistair Way, has been the best performing fund since the sell-off started in May last year, but is still down 6.35 per cent over the period.


Performance of fund, sector and index since 21 May 2013

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Source: FE Analytics

Launched in June 2012, the fund has over 50 per cent in Asia Pacific Equities. It has avoided the likes of Russia and other emerging European countries, which has helped it over the difficult period.

Way says he has been happy to hold quality growth stocks post financial crisis but has recently changed the fund’s strategy. He says dividend-paying stocks in particular are very expensive.

The manager is now focusing on small and mid-cap stocks, which he says are more attractively valued.

The next best performing fund – Fidelity Emerging Markets– has lost 6.46 per cent over the period.

Run by FE Alpha Manager Nick Price, the fund has been a top quartile performer in the IMA Global Emerging Markets sector over one and three years.

Since its inception in June 2010 it has returned 18.70 per cent to investors compared to 5.68 per cent from the sector average and 7.91 per cent from the index.

Other funds that have handled the downturn well include Baillie Gifford Emerging Markets Growth, First State Global Emerging Markets Sustainability and Templeton Emerging Markets Smaller Companies, which are the third, fourth and fifth best performing funds in the sector since the sell-off first started.

Performance of funds, sector and index since 21 May 2013

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Source: FE Analytics

First State is one of the best fund groups in the sector at protecting against the downside, Spear says. He says buying funds with a proven track record during difficult times is a good strategy at the moment given the short-term concerns still surrounding the asset class.

“I’ve got a lot of client money and even my own money in those funds,” he said. “However, in recent years they’ve kept on filling up and soft closing, which is frustrating.”

Over three years First State Global Emerging Markets has been the best performing fund in the sector, returning 17.3 per cent. It is one of only 10 funds in the sector to make money over the period.

The worst performing fund since the sell-off began is the $2bn Aberdeen Global Emerging Markets Smaller Companies fund, which has lost 19.55 per cent.


Performance of funds vs index since 21 May 2013

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Source: FE Analytics

Aberdeen has traditionally been prepared to hold more expensive stocks that fit in with a strict range of criteria, but the group has had a difficult time of late, with their tried and tested $9.1bn Aberdeen Global Emerging Markets Equity and £2.2bn Aberdeen Emerging Markets Equity funds even struggling to beat its MSCI EM benchmark in the downturn.

Premier’s Simon Evan-Cook who heads up a number of funds of funds including the five crown rated Premier Multi Asset Distribution portfolio, says he’s currently avoiding Aberdeen funds as he’s concerned over how big they’ve become.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.