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The global funds not afraid to bet big on emerging markets

26 August 2014

Most global funds shy away from emerging markets, but some highly rated portfolios have sizable allocations to this rallying sector.

By Gary Jackson,

News Editor, FE Trustnet

Global funds are frequently used as a core holding to diversify investors’ exposure from UK equities but many of the portfolios in the sector have very little exposure to emerging markets.

Although emerging market equities had a tough time in 2013, they have fared somewhat better over the course of this year. Signs that some of the worries afflicting these markets could prompt some investors to reconsider their exposure, but which global managers already have a decent weighting in the area?

FE Analytics shows the MSCI Emerging Markets index has risen 10.20 per cent over 2014 to date, compared with the 6.41 gain in the MSCI World. This is in stark contrast to 2013, when the developed markets represented in the MSCI World surged 24.32 per cent while emerging markets fell 4.46 per cent.

However, investors in global funds may have missed out on this turnaround.

Our data shows just 20 funds in the IMA Global sector have more than 10 per cent in global emerging market equities, while a handful more allocate to areas such as emerging Asia or South America.

In total, just 23 global funds have over 10 per cent in emerging markets and hold an FE Crown rating of one or higher.

Whitechurch Securities' head of research Ben Willis says it is not surprising that the typical global fund has a lack of exposure to emerging markets, as many are benchmarked against the MSCI World. This index covers 23 developed markets, with close to 55 per cent of it taken up by US stocks.

Even the MSCI All Countries World index, which tracks 23 developed markets and 23 emerging markets, has very little in the asset class. The US is the largest constituent at 48.76 per cent, followed by the UK at 7.79 per cent, Japan at 7.52 per cent, Canada at 3.90 per cent and France at 3.51 per cent.

Willis added: “With most global funds, you’re going to get minimal exposure to emerging markets as it’s such a broad universe and as these funds are core holdings they tend to be pretty defensive. You’d hope they’d allocate something to emerging markets but I’m not surprised to see it’s quite low.”

FE Analytics shows Peter Saacke’s £216.3m Artemis Global Growth fund is one of the funds overweight emerging markets and Asia ex-Japan that has maintained an attractive performance profile. It sits first quartile in the IMA Global sector over one, three, five and 10 years and has beaten its MSCI AC World benchmark over all these timeframes.

Performance of fund vs sector and index over 5yrs

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Source: FE Analytics

The four crown-rated fund has 26.2 per cent of its portfolio in Asia ex-Japan, with 1.7 per cent in the Middle East and Africa and 1.2 per cent in Latin America.


While the fund’s largest individual bets are in developed market companies, it does have China Construction Bank as its tenth largest holding at 1.3 per cent.

In his latest investor update, Saacke said: “[In July] Asia ex-Japan and emerging markets rallied while developed markets fell. This offered another hint that sentiment towards emerging markets, which have underperformed for most of the last three years, is becoming more positive. In part, this reflected attractive valuations – but stronger survey data and GDP growth from China also helped.”

Artemis Global Growth has a clean ongoing charges figure (OCF) of 0.90 per cent.

Mark Urquhart's £189.8m Baillie Gifford Long Term Global Growth is another global fund that has more than 20 per cent of its portfolio in emerging market equities.

FE Analytics shows 23.46 per cent of the fund in in global emerging markets, making it the second largest geographical bet after the 51.97 per cent in American stocks.

The fund also some high conviction positions in its top 10. At 8.94 per cent, its largest holding is Tencent, the Chinese investment holding company with subsidiaries active in mass media, entertainment, internet and mobile phone value-added services. It also has 8.20 per cent in Chinese search engine Baidu.

Baillie Gifford Long Term Global Growth is first quartile over one, three and five years and has outperformed the MSCI AC World over these three time frames. Over five years, the fund is gained 100.68 per cent against the index’s 70.96 per cent and the peer group’s 60.01 per cent.

Performance of fund vs sector and index over 5yrs

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Source: FE Analytics

This performance does come with extra volatility, as its volatility stands at 23.49 per cent over the past five years, compared with 15.95 per cent for the sector, while its maximum drawdown of 48.77 per cent is 10 percentage points higher than the sector’s. However, it also has a higher maximum gain and strong alpha generation at 3.75.

The three crown-rated fund has clean ongoing charges of 0.82 per cent.

Mark Breedon’s £474.6m Investec Global Strategic Equity fund has also outperformed its peer group and has more than 10 per cent in emerging equities. The fund is first quartile over one, three and five years.

Over 10 years it is up 153.29 per cent, which puts it in the second quarter of the IMA Global sector. This compares with a 131.37 per cent rise in the MSCI AC World and a 116.12 per cent advance in the average global fund.


Performance of fund vs sector and index over 10yrs

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Source: FE Analytics

The four crown-rated fund’s largest geographical weightings are to North America and Europe ex UK. It has 11.2 per cent in emerging markets with another 2.3 per cent in the far east ex Japan.

Investec Global Strategic Equity has a clean OCF of 0.87 per cent.

Recent research by FE Trustnet showed more than 75 per cent of funds in the IMA Global sector have failed to beat the MSCI World index over the past three years, suggesting they struggle to add value on their benchmarks.

Mike Deverell, investment manager at Equilibrium, said: “Approximately 80-90 per cent use the MSCI World as their benchmark which is at least 50 per cent US equities, so what you are buying is the US with a bit of other stuff.”

“You find that a lot of funds won’t deviate from that benchmark and that is a big problem.”

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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.