Though investors may be looking to add to their emerging markets exposure, a recent FE Trustnet study showed that a very high proportion of funds in the sector have been unable to beat the MSCI Emerging Markets index over recent years.
The figures were even worse when we removed the highly-popular, but now-closed First State and Aberdeen funds.
However, before investors go down the passive route, FE data shows there are a selection of funds in the two emerging market sectors that have generated long-term outperformance while largely ignoring the index.
Each of the three funds has outperformed the marker over a market cycle, but have done so with very low beta and very high tracking relative to MSCI EM.
McInroy & Wood Emerging Markets
The only fund on the list from the IMA Global Emerging Markets sector is McInroy & Wood Emerging Markets.
The £58.7m fund, which has five FE crowns, was launched by David Shaw-Stewart, Francis Seymour and Guido Bicocchi in March 2007. According to FE Analytics it has been the fifth best performing fund in the sector over that time with returns of 116.05 per cent, beating the MSCI Emerging Markets index by 46.33 percentage points.
Performance of fund versus sector and index since Mar 2007
Source: FE Analytics
The only four funds to have beaten it over that time have been First State Global Emerging Markets Leaders, First State Global Emerging Markets, Aberdeen Emerging Markets Equity and Aberdeen Global Emerging Markets Equity; which are all now closed to new investors.
The fund has no specified benchmark which means its returns have been very active.
McInroy & Wood Emerging Markets has had the lowest beta – 0.15 – and highest tracking error – 26.38 per cent – relative to the MSCI Emerging Markets index in the sector since its launch.
It has been consistent performer, turning in top quartile returns and beating the index in each calendar year since its launch, except in 2013 when it was third quartile with losses of 5.58 per cent. However, it has taken advantage of the recent rally and is once again top quartile in 2014.
Given that the Shaw-Stewart, Seymour and Bicocchi don’t have a benchmark, it isn’t too surprising that the portfolio looks very different to the majority of their peers’ funds. They don’t hold popular stocks such as Samsung or Taiwan Semiconductor, for example.
Asia is their largest regional weighting, making up more than 60 per cent of the fund. The managers will also hold developed market stocks that generate the majority of their earnings from emerging markets, like SAB Miller.
The fund has a total expense ratio (TER) of 1.69 per cent and also has a yield of 2.5 per cent.
Newton Asian Income
Next on the list is Jason Pidcock’s five crown-rated Newton Asian Income fund which has proven very popular with investors, and for good reason.
Our data shows that it has been the IMA Asia Pacific ex Japan sector’s sixth best performing portfolio since its launch in November 2005 with returns of 181.89 per cent, beating its benchmark – the FTSE Asia Pacific ex Japan index – by more than 30 percentage points in the process.
Performance of fund versus sector and index since Nov 2005
Source: FE Analytics
The now £5bn fund has the tenth highest tracking error in the sector relative to its benchmark since its launch and has the second lowest beta, over this period. Newton Asian Income boasts top quartile returns over three and five years and has beaten the sector and its benchmark in five of the last eight calendar years.
One of the years it underperformed, however, was in 2013 when it lost 0.74 per cent. Pidcock (pictured) blamed that underperformance on the impact the Fed’s tapering had on yielding equities and other stock specific issues.
The fund yields 4.95 per cent and Amandine Thierree, analyst at FE Research, says Pidcock’s income focus is one of the major reasons why it features on the FE Select 100.
“The flow of new opportunities in Asia has been sustained, which allowed the team to add companies with regular and growing revenue in the telecom, utilities and real estate space. This should assure investors a solid and rising income providing that Asian currencies do not collapse,” she said.
“Prospects for the capital growth side of the portfolio are more subdued as markets are still very much influenced by western policy decisions.”
The portfolio differs from others in the sector as Pidcock holds 40 per cent of his assets in Australia and New Zealand.
Newton Asian Income has an ongoing charges figure (OCF) of 0.82 per cent.
Veritas Asian
Veritas, as a group, are probably best known for their top performing Veritas Global Equity Income fund.
However, their $380m Asian fund, which is run by FE Alpha Manager Ezra Sun, has generated strong returns since its launch in October 2004. According to FE Analytics, it has been the fifth best performing fund in the IMA Asia Pacific ex Japan sector with returns of 281.34 per cent.
Its MSCI Asia Pacific ex Japan benchmark has returned 60 percentage points less over that time.
Performance of fund versus sector and index since October 2004
Source: FE Analytics
The Irish-domiciled fund has had the fourth lowest beta and fourth highest tracking error, relative to its benchmark, in the sector since its launch.
Veritas Asian has outperformed over one and three year periods, but is down against the sector and index over five years due to its relatively lack-lustre returns in 2009, 2010 and 2011.
Like Pidcock and his Newton Asian Income, Sun has a high weighting to Australia in his Veritas Asian fund. His largest sector weighting is to information technology, with the likes of Tencent, Naver Corporation and Largan Precision.
The fund has a TER of 1.22 per cent.
