While there will no doubt be volatility along the way, experts who have been upping their exposure to the developing world have done so because of the long-term theme of an emerging middle class and growing consumerism.
Performance of indices in 2014
Source: FE Analytics
However, though investors may want to tap into those trends, a recent FE Trustnet article highlighted that the large majority of active managers in the open-ended sectors have failed to generate market-beating returns in the past.
While some may want to use passive funds for their exposure, another option may be to use investment trusts, which typically outperform their open-ended rivals over the longer term.
With that in mind, and in the next of the series, we compare and contrast two high profile portfolios in the IT Global Emerging Market Equities sector: Dr Mark Mobius’s Templeton Emerging Markets IT and Terry Smith’s newly-launched Fundsmith Emerging Equities Trust.
Mobius (pictured) is one of the longest-serving managers in the investment trust space, launching his portfolio way back in June 1989.
Numis Securities’ Ewan Lovett-Turner says it is a good option for retail investors because, at nearly £2bn, it is one of the largest and most liquid trusts available so individuals can trade shares with ease.However, he says investors who buy Templeton Emerging Markets IT should realise that the manager has a very clear strategy which means returns can be volatile.
“He has a pretty clear value style which he has used for a very long time. He also runs the portfolio with pretty low turnover,” Lovett-Turner said.
“He has made a few changes recently, but he has a very strict valuation discipline and so you know exactly what you are getting from him.”
Mobius has a very strong long-term track record. According to FE Analytics, Templeton Emerging Markets IT has returned 376.19 per cent over 10 years, beating its benchmark – the MSCI Emerging Markets index – which has returned 236.68 per cent over that time.
Performance of trust vs index over 10yrs
Source: FE Analytics
However, it is a portfolio that tends to make the most of rising markets and offers little protection when sentiment is negative.
Our data shows it underperformed in the crash year of 2008 with losses of 40 per cent, but then massively outperformed in 2009 when markets rebounded with returns of close to 100 per cent.
Mobius’ style meant the trust struggled in 2013 when investors became increasingly concerned about the impact tighter US monetary policy would have on developing economies. It lost 8 per cent last year and has since outperformed its benchmark once again in 2014 as the index has rallied.
Mobius currently holds 30 per cent in basic material stocks and 26.9 per cent in financials with Brilliance China Finance and Itau Unibanco featuring in his top 10. His biggest regional bets are China/Hong Kong, Brazil and Thailand.
Terry Smith’s Fundsmith Emerging Equities, which launched earlier this year, will be managed in a very different way, however.
Lovett-Turner says Smith (pictured) will run a highly concentrated portfolio of quality companies that display predictable earnings, have a strong franchise and deliver high returns on capital. Smith will also only invest in certain sectors.
“The investment manager will avoid the financial sector and heavily cyclical sectors such as construction and manufacturing, utilities, resources and transport, and will instead focus almost exclusively on consumer stocks and in any event only on stocks in companies which will benefit from the rise of the consuming class in the developing economies,” Smith said in his most recent factsheet.
The trust was only launched in June and Smith is taking his time to invest, as he currently holds 75 per cent in cash. However, investors who are considering buying the trust can analyse Smith’s £2.2bn Fundsmith Equity fund, which sits in the IMA Global sector.
Though Lovett-Turner says the manager is yet un-tested in emerging markets, his new trust will be run using the same approach as in his fund.
The five crown rated fund was launched in November 2010 and our data shows it has been the fifth best performing portfolio in the highly competitive sector over that time with returns of 72.99 per cent, beating its MSCI World benchmark by more than 20 percentage points.
Performance of fund vs sector and index since Nov 2010
Source: FE Analytics
The fund has outperformed in each calendar year since its launch and has been less volatile than both the sector and index over that time; however Lovett-Turner warns that as Smith will only invest in consumer-facing stocks and will run a concentrated portfolio, investors can expect volatility from his emerging market trust in the future.
So far, Smith holds 46 per cent of the trust’s invested assets in the EMEA region, 34 per cent in Asia and 20 per cent in South America; though that is likely to change as the manager puts more money to work.
The expert's view
Lovett-Turner favours Mobius’ Templeton Emerging Market Investment Trust.
Though he says Smith has a strong track record in his global fund, he is waiting to see how the manager performs running such a niche mandate.
He also says that as Fundsmith Emerging Equities Trust is trading on a 10 per cent premium, while Mobius’ trust is on a 10 per cent discount, it is clear where the value is.
“Terry Smith has clearly attracted a lot of his investors to his new trust, but when you see an emerging market trust trading out on a 10 per cent discount, there are usually buyers who are waiting for it to widen so there is somewhat of a floor to Templeton’s discount,” Lovett-Turner said.
The analyst also points that Smith’s trust is likely to be more expensive than the Templeton portfolio.
Templeton Emerging Markets has an ongoing charges figure (OCF) of 1.1 per cent while the OCF for the Fundsmith trust is estimated to be around 1.6 or 1.7 per cent.
Neither trust is currently geared.
