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Funds for rising and falling markets: Global Emerging Markets

05 May 2014

In the next article in the series, FE Trustnet takes a look at Global Emerging Markets funds that have managed to both protect effectively against the downside and deliver competitive returns in rising markets.

By Daniel Lanyon,

Reporter, FE Trustnet

Emerging markets have been one of the most unpopular asset classes over the past year after a tumultuous period of underperformance.

Investors have flocked away after a sell-off began in April 2013 with net investor outflows running into the billions of pounds, after the announcement of plans by the Fed to taper its monthly stimulus program.

The sell-off was further exacerbated at beginning of 2014 after currency fears spread through several countries after the Fed began the taper.

The negative sentiment on emerging markets centres around a perceived slowdown in Chinese growth and the potential contagion into other undeveloped markets that would follow.

Those with a more positive outlook toward emerging markets point to the underlying demographic fundamentals providing a long term investment story.

It is hard to doubt that over the long term there is a great deal of potential in emerging markets and that compared to rallying developed markets, valuations are much lower.

However, as shown in the past few years, emerging markets are arguably more prone to greater volatility and geopolitical risk.

With that in mind here are two funds worth considering for your portfolio, which have demonstrated upside growth as well as downside protection.


First State Global Emerging Markets Sustainability


The £273m fund is managed by FE Alpha Managers David Gait and Millar Mathieson.

It has beaten its sector and benchmark over three years, returning 20.22 per cent compared to an average loss in the IMA Global Emerging Markets sector of 10.73 per cent and fall in the MSCI Emerging Markets index of 11.36 per cent.

Performance of fund vs sector and benchmark over 3yrs

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Source: FE Analytics

It’s a fund highly rated by Mike Deverell (pictured), investment manager of Equilibrium Asset Management, who says emerging market are good value from a valuations point of view compared to western economies. ALT_TAG

“This fund in particular makes a good emerging market play if investors take a longer term view and are also worried about volatility,” he said.

“The First State group have always done really well in emerging markets and they have tended to do it by avoiding the drops.”

“They have a quality bias and a large cap focus which will particularly help them in bumpier markets; however it may also mean they underperform in rising markets.”


“By tending to be quite defensive, when you have down periods to the market, that has helped them to avoid them more than other funds which has added up to good performance overall.”

However, Deverell says he expects emerging markets are going to pick up in the medium term and thinks the fund may underperform due to its defensive position.

“They won’t necessarily keep up with the market if it’s rising strongly but in a more bumpy market they will tend to do quite well.”

The fund has also achieved the lowest level of annualised volatility in its sector over six years whilst also generating the greatest returns.

Like First State Global Emerging Markets and First State Global Emerging Markets Leaders, the fund has soft-closed; however, investors can still get access to it via platforms if they are willing to cough up an initial fee.


McInroy & Wood Emerging Markets

The £47m fund, co-managed by David Shaw Stewart, Francis Seymour and Guido Bicocchi, has been a top quartile performer in every full calendar year since its launch in August 2007, apart from 2013.

Since its launch the five crown-rated fund has returned 90.16 per cent compared to an average return in the IMA Global Emerging Markets sector of 44.23 per cent and a rise in the MSCI Emerging Markets Index of 53.71 per cent.

Performance of fund vs sector and benchmark since launch

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Source: FE Analytics

From a risk/return point of view the fund has managed to achieve the sixth best return in the sector, over six years, with annualised volatility lower than the sector average and only slightly higher than the level of annualise volatility in its benchmark.

Deverell says there is a greater need for investors to choose funds investing in a particular region that they favour and recommends Asia and particularly China.

The fund has an overweight position in Asian equities compared to its benchmark with almost two-thirds of the portfolio exposed to the region, which Deverell says should provide healthy returns for the longer term but may provide volatility along the way.


“Companies in China generally have a lot of opportunity to grow but we are advising investors to be very selective about emerging markets at the moment.”

“Historically, I have advised index tracking funds for emerging markets but now we think it is much better now to use highly active managers who will do something completely away from the index and just find good companies no matter where they are.”

“Investors need to start by selecting the region they think will perform best. The extreme example at the moment is with Russia which compared to Asia is doing something different and Latin America, which is doing something very different.”

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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.