The MSCI Emerging Markets index is up 10.89 per cent in 2014 so far while the average fund in the IMA Global Emerging Markets sector has gained 8.77 per cent. Meanwhile, UK retail investors put £53m into the sector during July – the largest volume of inflows since September 2013.
Aberdeen and First State, the two leaders in the emerging markets space, moved to discourage inflows into some of their most popular funds last year. This means that existing holders of these funds looking to up their exposure to emerging markets may have to search elsewhere.
However, recent research by FE Trustnet found that just one-third of large cap emerging markets funds have outperformed the MSCI Emerging Markets index over five years.
Investors may find that combining funds with a lower correlation to one another could avoid their holdings moving up and down in lock-step.
The latest FE Trustnet study put the IMA Global Emerging Markets sector under the spotlight to identify which products can offer diversification to an investor in the sector’s largest funds.
The three largest funds in the peer group – Aberdeen Global Emerging Markets Equity, First State Global Emerging Markets Leaders and Aberdeen Emerging Markets Equity – have a high correlation to each other.
FE Analytics data shows the two Aberdeen funds are perfectly correlated over three years and have a correlation of 0.94 to the First State offering.
Despite having a seemingly large investment universe to maneuver in, correlations across emerging markets funds are high in general. Only a handful of products in the sector have a correlation of less than 0.90 with an equally weighted portfolio of the three largest funds.
The £188.5m Templeton Emerging Markets Smaller Companies fund, managed by Mark Mobius with Dennis Lim and Tom Wu as deputies, has the lowest correlation to this portfolio.
The fund’s focus on the MSCI Emerging Markets Small Cap index explains its three-year correlation of 0.78 to the larger funds, which are benchmarked against the MSCI Emerging Markets index.
The portfolio has returned 65.53 per cent over five years, compared with 45.3 per cent from the MSCI Emerging Markets index and 40.26 per cent from the IMA Global Emerging Markets sector.
It has also outperformed the sector and index over one and three years.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has been less volatile than the average emerging markets fund and its benchmark over five years.
However, its maximum drawdown is higher at 29.73 per cent, compared with its peer group’s 23.36 per cent and the index’s 23.18 per cent.
Templeton Emerging Markets Smaller Companies has an ongoing charges figure (OCF) of 2.49 per cent.
The €217m, four crown-rated Carmignac Portfolio Emerging Discovery fund, managed by Xavier Hovassen and David Young Park, takes a non-benchmarked approach to emerging market equities and has a correlation of 0.83 to the portfolio of Aberdeen and First State funds.
Its top holdings include Columbian bank Banco Davivienda, Indian materials firm Shree Cement and South Korean web portal Daum Communications.
Around 83 per cent of the portfolio is held in mid caps, with almost 15 per cent in small caps and only 1.9 per cent in larger companies.
It has returned 1.54 per cent since launch in December 2010, avoiding the 4.36 per cent drop seen in the average emerging markets fund.
Its return is far less than the 20.51 per cent of the First State fund over this time, which has exposure to developed market equities, and below the gains of about 5 per cent in the Aberdeen offerings.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
However, it shows less volatility than the Aberdeen funds and the sector over three years, at just 12.12 per cent annualised.
Its maximum drawdown over this time is 14.99 per cent, just below First State’s 15.27 per cent and well under Aberdeen Emerging Markets Equity's 23.63 per cent and Aberdeen Global Emerging Markets Equity's 24.05 per cent.
Carmignac Portfolio Emerging Discovery has ongoing charges of 1.3 per cent on its hedged sterling share class.
Richard Sneller’s £526.2m, four crown-rated fund Baillie Gifford Emerging Markets Growth fund has a correlation of 0.85 to the three largest funds in the IMA Global Emerging Markets sector.
It soft-closed in April 2011 after it reached £1bn, but was subsequently reopened earlier this year after assets under management fell sharply as investors moved out of emerging market equities.
Baillie Gifford Emerging Markets Growth is first quartile in its sector over one year and second quartile over three and five years.
It underperformed in 2010, 2011 and 2012, but made a positive return last year, when the average fund lost about 3.8 per cent, and is up more than 12 per cent in 2014 so far.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It is the most volatile fund over three years of all the portfolios reviewed in this article, with a score of 16.29 per cent.
However, its maximum drawdown is broadly in line with First State Global Emerging Markets Leaders’, at 15.67 per cent, and significantly below the Aberdeen funds’.
Baillie Gifford Emerging Markets Growth has an OCF of 1.62 per cent.
