First State Asia Pacific Leaders is one of three funds in the IMA Asia Pacific ex Japan sector with inflows exceeding £100m over the past three months, according to FE Trustnet research. Star manager Angus Tulloch’s fund has taken almost £300m to the beginning of September according to inflows data from FE Analytics, pushing total assets under management (AUM) to £7.3bn. Jason Pidcock’s Newton Asian Income fund and the BlackRock Pacific ex Japan Equity Tracker have also proven popular with investors of late, with inflows of £189m and £141m respectively.
The First State fund is the tenth best seller overall over the period, behind core portfolio such as Standard Life GARS and M&G Optimal Income, and a swathe of property portfolios.
Net inflows have been in positive territory as well; our data shows that only one emerging Asia fund – Schroder Institutional Pacific – has seen outflows of more than £100m, with the next losing just £39m.
This trend is a far cry from the mass outflows experienced by the sector in 2013 and much of 2014. In spite of strong sales in the short-term, FE data shows that six funds including First State Asia Pacific Leaders and Aberdeen Asia Pacific Equity have suffered outflows of more than £100m over the past 12 months.
Worries over QE-tapering and the sustainability of Chinese growth contributed to a big correction in the middle of last year, leading many investors to lose their nerve. Significant outflows followed, exacerbating the sell-off, which saw the Asia Pacific ex Japan sector lose around 15 per cent between May 2013 and February 2014.
It appears the negative sentiment hit rock bottom at the beginning of the year however, and Asia Pacific funds are among the best-performing in the IMA universe year-to-date. Tulloch (pictured) has led the way, as a recent FE Trustnet article recently highlighted.
The change in sentiment is reflected by the graph below, which shows how the size of First State Asia Pacific Leaders has changed since October 2011. AUM peaked at £7.6bn in March last year, but outflows exceeding £1bn and steep capital losses saw the figure dip below £5.7bn in February 2014.
Size of fund since Oct 2011
Source: FE Analytics
The recent improvement in performance and inflows has pushed AUM back to record levels.
While this reversal isn’t as evident in the IMA Global Emerging Markets sector, redemptions do appear to have slowed in recent months. The likes of First State Global Emerging Market Leaders and Aberdeen Emerging Markets Equity have suffered outflows of almost £1bn over the past year, with the figures for three months at £152m and £130m, respectively.
Some funds have even started to take significant inflows. Somerset Emerging Markets Dividend Growth and M&G Global Emerging Markets have both taken more than £100m in the three months to September, for example. Our data shows that net inflows for the entire sector are slightly positive over the period.
A number of experts recommended that investors buy into battered emerging market funds at the beginning of the year, including manager of the Unicorn Mastertrust Peter Walls and head of FE Research Rob Gleeson.
Performance of funds and indices in 2014
Source: FE Analytics
They have so far been proven right, but it remains to be seen whether emerging markets can maintain their strong run. Some believe that there is strong momentum behind emerging markets and should “follow the money”, while others are wary that all we’ve seen over the past nine months or so is a “dead cat bounce.”
Fund analyst at Brewin Dolphin Michael Paul suggests the improving sentiment towards emerging markets is linked to a poorer outlook for the West, though he says structural improvements imply that the recovery is more sustainable than simply a value play.
“Last week’s fund flows saw investors switch some exposure from developed equities into emerging markets. The short term outlook for the developed world is clouded in uncertainty, with events such as next week’s FOMC meeting in the US and the Scottish referendum, encouraging investors to take profits from the asset class,” he said.
“However, this cautious tone has not extended to emerging markets, where despite spiralling sanctions against Russia, inflows were sufficient to absorb developed market redemptions, and leave global equity weightings broadly unchanged.”
“Reform packages across a number of emerging markets have improved sentiment towards the region, and resulted in relative outperformance over the year.”
“The latest situation which is encouraging investors are the developments in the Brazilian election race, where Marina Silva, a new entrant following the tragic death of Eduardo Campos, is leading in recent polls.”
Margett's Toby Ricketts is also positive on emerging markets over the long-term, but says that earnings growth is needed for the rally to be sustainable.
It’s interesting to note that investors are turning to more cautious managers to get their emerging market exposure. The likes of Tulloch, Pidcock, M&G’s Matthew Vaight and Somerset’s Ed Lam all prioritise downside protection, and have a lower annualised volatility than the MSCI EM index in recent years.
While not one of the best-selling funds in recent months, Paul recommends Fidelity Emerging Markets as an ideal fund for investors looking to dip their toe back into the sector.
“We are encouraged by these reform stories across many emerging markets, however remain aware of the structural headwinds the region continues to face with the prospect of a normalisation in US interest rates on the horizon,” he said.
“We would therefore recommend investors consider the Fidelity Emerging Markets fund to gain access to this story.”
“The strategy has a defensive growth orientation, which means it is likely to produce the majority of its outperformance in difficult market conditions. We feel it provides an ideal balance between its defensive characteristics and the exposure to high quality growth opportunities.”
Performance of fund, sector and index since launch
Source: FE Analytics
FE Alpha Manager Nick Price’s fund weathered the storm during 2013 and the beginning of 2014 much better than most, and is well ahead of its peers and sector since its launch in 2010.
FE Trustnet wrote an article examining why investors may need to re-evaluate their emerging market exposure and invest directly in the region.