Aberdeen Emerging Markets Equity and First State Global Emerging Market Leaders are standout performers in both the performance and sales charts over the past decade.
Their defensive quality bias, which sees them partake in rising markets but protect extensively on the downside, has proven popular –and with good reason.
Ricketts (pictured), who runs the Margetts fund of funds range, holds the £619m Fidelity Emerging Markets fund alongside the £2.3bn Aberdeen and £3.2bn First State portfolios.
He says all three should outperform their sector and MSCI EM benchmark over the long-term, but believes holding the three together will dampen volatility along the way.Price and his team focus on the growth of the middle class consumer, and while First State and Aberdeen do have exposure to this story, they have a much keener focus on quality.
“If an investor wants to buy just one emerging market fund this is probably not the one they should buy; however, if you want to blend it with other funds it works very well to dampen volatility, with its long term consumer growth strategy,” he explained.
“We hold it alongside First State and Aberdeen. Your overall volatility will dampen because those two will outperform when the Fidelity fund is underperforming and vice versa so you get better diversification. It is a fund that complements their more defensive style and you want to hold funds that balance together.”
“If you are going to hold a blend of funds then they all need to outperform in the long term without being too correlated in the short-term. This way you reduce your overall volatility whilst still capturing most of the upside from the underlying market.”
Over the past three years all three funds have made a positive return and are top quartile in IMA Global Emerging Markets.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
The Fidelity Emerging Markets fund was the top performer in its sector in 2013 making 9.44 per cent – a period during which the average fund in the sector made a loss of 3.84 per cent.
By contrast, the Aberdeen fund was one of the worst performers and First State fell to second quartile after three successful years of top quartile performance.
FE Alpha Manager Nick Price has been at the helm since Fidelity Emerging Markets launched in June 2010.
Over this period it has been the ninth best performer in the IMA Global Emerging Markets sector.
Performance of fund, sector and index since June 2010
Source: FE Analytics
It has had a choppier start to this year, and is currently one of worst performers year to date, down more than 2 per cent.
True to Ricketts’ word, Aberdeen Emerging Markets Equity has been one of the very best performers in the sector this year with 6.15 per cent, with First State Global Emerging Market Leaders returning a more moderate 4 per cent.
Price has a strong focus on consumer products, with the sector making up 41.9 per cent of its portfolio – a massive overweight compared to its benchmark and peers.
The fund’s second largest theme is financials, which is itself linked to the rise of the consumer. It has a 23.8 per cent weighting.
“This fund follows a consumer trend and so when developed markets are performing it tends to be the better emerging market fund. Most of our emerging market holdings are more defensive and so this works well,” Ricketts says.
Fidelity Emerging Markets has an overweight position in India, at 7.6 per cent.
Price says he expects the recent election of the pro-enterprise politician Narendra Modi will see the region outperform the wider emerging market index.
“The macroeconomic position in India is improving dramatically and it is probably the brightest story in emerging markets, or indeed globally,” Price said.
However, the manager has been trimming exposure to Russia following its ongoing conflict with Ukraine, which he says hit the performance of his fund earlier in the year.
The FE Research team are big fans of Fidelity Emerging Markets, including it in the coveted FE Select 100 list.
The team points to Fidelity’s management of corporate governance as a particular draw.
“The portfolio is made up of companies that return enough money to finance themselves or pay dividends to shareholders,” they said.
“This kind of capital allocation illustrates management discipline and goes hand in hand with attention paid to corporate governance, which can be circumspect in developing countries.”
Fidelity Emerging Markets has clean ongoing charges of 1.03 per cent.