From 1 December the giant fund as well as the First State Global Emerging Markets and First State Global Emerging Markets Sustainability funds will be classified in the IMA Specialist sector.
First State says the IMA has been reviewing if the products should be categorised as emerging market funds because it requires that a sector member has at least 80 per cent invested in stocks listed in emerging market countries.
“Whilst the funds may no longer be classified as GEM funds by the IMA, it will of course be easy to compare the funds’ performance to the peer group and the index, and we intend to help clients to do this in future,” a spokesperson for First State said.
“We hope that clients trust that we are doing this for the right reasons – namely giving us the best chance of making acceptable investment returns over the years and hopefully decades to come.”
How to play emerging markets has been heavily debated of late, with many managers and commentators preferring to access the high-growth markets of Asia and Latin America through high quality developed market-listed mega-caps such as Unilever.
Indeed, the five crown-rated First State Global Emerging Markets Leaders fund has 6.5 per cent in Unilever, its largest single position.
According to its most recent fact sheet the fund has 14.4 per cent in UK equities and 13.9 per cent in US equities – a considerable overweight compared to the average fund in the sector.
Raymond Ma, who manages the Fidelity China Consumer fund, says investors should be reducing emerging market exposure through companies such as Diageo, Unilever and Burberry in favour of domestic names as these companies tend to lose out to local players better suited to meet consumer demand.
First State’s strategy has been arguably successful with the Leaders fund one of the sector’s top performing funds. It is top quartile over one, three, five and 10 years. In 2014 it is the 14th best out of 79 funds.
Since the sell-off in emerging market stocks in May last year the fund has proven one of the most defensive in the sector losing just 3.31 per cent, while the FTSE Emerging Market index lost 8.14 per cent and the average fund in the IMA Global Emerging Markets sector lost 8.59 per cent.
However, those investors who are looking for pure emerging market exposure may wish to move their cash to a fund that will remain within the sector’s guidelines and here we look at several options.
Aberdeen Emerging Markets Equity
This £2.2bn fund is a natural rival to the First State Global Emerging Markets Leaders fund, being of a similar size and performance over the longer term.
Fund research firm Square Mile awards its highest rating – AAA – and says the fund benefits from a large team with a long track record of investing in emerging markets.
“We have a high regard for the Aberdeen management team and their well-tested process, which over the long run has provided strong returns for investors. The unconstrained mandate and the emphasis on quality means that the fund can deliver a highly variable performance relative to the index, although in general, it has tended to defend well in falling markets,” the firm said.
However it adds that the fund may not suit investors looking for benchmark-like returns but may suit those with a longer-term horizon.
According to FE Analytics, the fund has returned 35.53 per cent over the past five years while the average fund in the sector has returned 14.41 per cent and the MSCI Emerging Markets index has gained 15.97 per cent.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure [OCF] of 1.23 per cent.
Somerset Global Emerging Markets
This £36.9m fund, managed by Edward Robertson with FE Alpha Manager Mark Asquith as his deputy, is considerably smaller than First State Global Emerging Markets Leaders but also has a good five-year figure, having returned 29.33 per cent.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
It also beat the sector and index since the sell-off – by more than two percentage points – last year, having lost 6.19 per cent.
Square Mile says the fund offers access to an experienced portfolio manager in Robertson.
“We like the stability in the Somerset team, their strong investment culture and their focused attention to this region. The manager has run this strategy successfully since his days at Lloyd George; the exception being in 2009 when he took a very defensive stance and the fund lagged the index substantially in relative terms,” Square Mile said.
“Given the extreme circumstances under which the market rallied in 2009, we do not believe it is a measure of his skill as a manager and see this fund a solid choice for investors looking to invest in the region.”
However, they warn it may lag behind other funds in very strong rising markets due to a defensive bias.
The fund has an OCF of 1.07 per cent.
Lazard Emerging Markets
This £600m fund has been managed from New York by its manager since 1997, James Donald.
It has a wide geographical spread with large positions across Asia, South America, emerging Europe and the Middle East and North Africa.
It is also top quartile over five years, having returned 25.14 per cent and beating both the sector and index.
Performance of fund, sector and index over 5yrs
Source: FE Analytics
It also stood up against the sell-off last year thanks to its geographical spread, losing two percentage points less than the sector and index. However its performance has slightly lagged the index this year.
Square Mile says Donald’s process reflects the heightened risks of investing in emerging markets.
“The process identifies favourably valued growth companies with sustainable business models. The fund should perform relatively well in most market environments but may lag in strong liquidity-driven market advances. The team have built an impressive long-term track record over the years which has helped validate our confidence in the process.”
“The fundamental research discipline has worked well in uncovering valuation anomalies in the market and helped isolate the managers from the swings in sentiment that can dominate these markets from time to time.”
The fund has an OCF of 1.07 per cent.
