Aberdeen and First State have historically been the leading light in the emerging market sectors. However, due to their strong track records, a number of the two groups’ funds are either reaching capacity or have already been soft-closed, leaving investors in a frustrating predicament. Mike Deverell, investment manager at the group and a member of the AFI Panel, admits that the opportunity-set in the IMA Global Emerging Markets sector, if you were to remove First State and Aberdeen funds, isn’t as strong as in other sectors.
Therefore, he says he will be the using the Norwegian-domiciled Skagen KonTiki fund for his emerging market exposure.
“When we choose our funds, we create our own metrics and score each portfolio individually,” Deverell explained.
“The main aspects we look at are how consistently they have performed and how consistent their alpha generation has been. However, there really aren’t any funds in the emerging market sector that have done that, apart from First State and, to a lesser extent, Aberdeen.”
“There are a number of funds that have a good overall track record but they are the ones which perform well when in either a rising or a falling market, not both.”
“We want something that has been consistent in the past and can continue to be consistent in the future; and that is why we have chosen the Skagen fund.”
The £5.7bn Skagen KonTiki fund was launched in April 2002, but only came into the IMA universe recently.
While it is benchmarked against the MSCI Emerging Markets index, it sits in the IMA Global sector – instead of the IMA Global Emerging Markets sector – so that the managers have a higher degree of flexibility.
According to FE Analytics, the fund – which is headed up by Kristoffer Stensrud – has returned 646.31 per cent since launch, beating its benchmark by a hefty 427 percentage points.
As a point of comparison, the average fund in the IMA Global Emerging Markets sector has returned 208.76 per cent over that time.
Performance of fund vs sector and index since April 2002
Source: FE Analytics
That means that it would be the best performing portfolio in the sector, comfortably outperforming its high profile rivals like Aberdeen Emerging Markets Equity and First State Global Emerging Market Leaders.
Those returns have been consistent as well. Our data shows that the fund has beaten its benchmark in every calendar year since its launch, except in 2012 when it returned 8 per cent compared the index’s returns of 13.03 per cent.
That means that Skagen KonTiki has beaten the index over rolling one, three, five, seven and 10 year periods and, by extension, would be a top quartile performer in the IMA Global Emerging Markets sector over cumulative one, five, seven and 10 year periods.
Deverelll attributes Stensrud’s success to his value approach and the fact he is completely benchmark agnostic. Because of that style, he expects the Skagen fund to continue to outperform.
“There have been very few funds, apart from Aberdeen and First State, that have stood out in terms of consistently beating the index and therefore we have, in the past, tended to use passive funds,” Deverell said.
“However, we feel the situation has in changed in the emerging markets which should help active managers.”
“We are seeing slowing growth in emerging markets and while there has always been disparity between the different regions, given the impact of Ukraine crisis on Eastern Europe, problems in South America and with issues in China, opportunities will be patchier.”
“The Skagen fund’s value and bottom-up approach – and as the manager isn’t worried about which country he invests in – should work well in this environment.”
Data from FE Analytics shows that Skagen KonTiki has generated more alpha relative to its benchmark than any other IMA Global Emerging Markets fund over 10 years and Aberdeen Emerging Markets Equity is the only portfolio to have beaten its information ratio over that time. It also has one of the best Sharpe ratios over the last decade.
It must be noted, however, that it is difficult to make a fair comparison between the Skagen fund and the average fund in the Emerging Market sector as the former has a far greater degree of flexibility.
Deverell says that the manager can invest up to half of his portfolio in developed markets, though all of those companies have to have the majority of their earnings coming from the developing world.
IMA Global Emerging Markets funds, on the other hand, must have 80 per cent of their assets invested in companies listed in emerging markets.
That greater flexibility could well have helped Skagen KonTiki outperform recently. For instance, in 2013 – which was a particularly turbulent year for the developing world – the fund returned more than 7 per cent while the sector and benchmark lost around 3 per cent.
Performance of fund vs sector and index in 2013
Source: FE Analytics
Currently, the Skagen fund has more than 10 per cent invested in Norway, Sweden and Denmark.
Also, while the portfolio has a high weighting to emerging markets such as South Korea, India, China, Russia and Brazil, 32 per cent of the fund is invested in “other” markets, which more than likely includes companies listed in the likes of the US, UK, Europe and Japan.
However, this isn’t something that concerns Deverell as he likes the fact the fund can invest across the market to generate returns and alpha.
First State are contemplating moving their five crown rated Global Emerging Market Leaders fund, which is headed up by Jonathan Asante, into the IMA Global sector in order to boost flexibility, as well.
One of the other possible issues for a potential new investor, however, is that fact the Skagen fund has already grown to £5.7bn. Deverell, like many of his peers, says that size can ultimately impact on a portfolios performance. Nevertheless, he says the fund can grow to a bigger size from here without ruining performance.
“Capacity is something we always think about when we choose a fund,” Deverell said.
“One of the main reason we wanted the Skagen fund is because we want something that will do something completely different to the MSCI Emerging Markets index.”
“We wanted a fund that could go where it sees value and not to be constrained by a benchmark, but when see that it is already more than £5bn, you should rightly question whether it can do that.”
“However, after the conversations we have had with them, we are happy with the size. They say the strategy can grow to at least £7bn,” he added.
Skagen Kontiki has a total expense ratio (TER) of 1.51 per cent and is available on select platforms. It is likely to be available on more platforms over the coming year.
