Both groups have highly rated managers – such as Jonathan Asante and Devan Kaloo – easy to understand processes and stellar long-term track records, with their funds littering the top decile of the IMA Global Emerging Markets sector over five, seven and 10 years.
However, owing to their dominance of the sector and historical outperformance relative to the index, more and more investors bought into the two groups’ ranges leaving the majority of their global emerging market funds at, or very near, capacity – much to the annoyance of fund allocators.
This has left investors in a difficult situation as there seems to be dearth of viable alternatives, with a number of FE Trustnet studies showing just how few non-First State and Aberdeen funds have managed to consistently beat the MSCI Emerging Markets index.
Performance of composite portfolio vs index over 10yrs
Source: FE Analytics
However, one which has consistently outperformed the index – and has even beaten First State and Aberdeen over the very long term – is the Norwegian-domiciled Skagen Kon-Tiki fund and the group is ramping up its efforts to become a much bigger presence in the UK retail market.
“This fund is front and centre of what we want to market at the moment,” a spokesperson from Skagen said.
It’s easy to see why. Since its launch in April 2002, Skagen KonTiki has returned 669.29 per cent, beating its MSCI Emerging Markets benchmark by more than 400 percentage points in the process. As a point of comparison the Aberdeen Emerging Markets Equity fund has returned 427.39 per cent.
Performance of funds vs sector and index since Apr 2002
Source: FE Analytics
The First State Global Emerging Markets Leaders fund was launched a year later in September 2003. The Skagen fund has outperformed that portfolio as well, as our data shows that First State GEM Leaders has returned 349.20 per cent since inception, while KonTiki has gained 445.51 per cent.
Those returns haven’t just come from one or two good years, either. Though Skagen KonTiki is struggling relative to the index in 2014, it has outperformed its benchmark in every full calendar year except 2012 since launch.
Like with the success of the First State and Aberdeen funds, Erik Landgraff – who co-manages the portfolio alongside Kristoffer Stensrud, Knut Harald Nilsson, Catherine Gether and Hilde Jenssen – says those returns come from focusing on bottom-up long-term stock-picking.
“Any outcome is driven by skill plus luck, if you were to put it into an equation. We could talk a lot about where we think the markets are going to go over the next year, but then we would be squarely in the domain of luck,” Landgraff (pictured) said.However, there are some very key differences between the Skagen fund and its better known rivals.
Firstly, they are value rather than growth investors. The investment approach is based around what they call the “the three Us”, by which they focus on companies they think are unpopular, under researched and undervalued.
“The key objective is to find mispriced securities. Mispriced is an important nuance because it’s not just about finding the cheapest stocks or applying a static approach to value. We are definitely value investors, but it’s more of a dynamic thing,” Landgraff explained.
“By that, I mean it could be a very, very cheap company where the assets in liquidation are worth significantly more than the market cap or it could be a wonderful company that’s going nicely but we think its trading more cheaply than we think its worth.”
This means the portfolio looks quite different to other emerging market funds as the management team don’t hold some of the more popular, but increasingly expensive, consumer staple names.
Because they won’t just buy cheap stocks for the sake of it, they have underweight positions in energy, oil and gas stocks as well as very little exposure to large state owned banks.
“One thing we have learnt over the past few years is that we do prefer companies that are masters of their own fate. If you main product or your sales depend on the price of a raw material, then you are probably not in that camp.”
The performance of the fund means it is coming onto the radar of an increasing number of wealth managers, such as Equilibrium’s Mike Deverell who is eyeing up it up for his emerging market exposure rather than the Vanguard tracker he currently uses.
However, the other key difference between the Skagen fund and the Aberdeen and First State offerings is that Landgraff and his team only have to invest 50 per cent of their portfolio in companies listed in emerging markets. Therefore the fund resides in the IMA Global, rather than the Global Emerging Markets, sector.
This may well be the big turn-off for some investors as it could mess up a fund allocator’s portfolio composition, possibly causing stock, sector or regional overlaps.
Landgraff is quick to point out that his team will only invest in developed market stocks which derive the large majority of their earnings from emerging markets and that the weighting to UK, US and European-listed stocks is unlikely to ever go beyond 30 per cent.
Nevertheless, that weighting to developed market companies – even if they really only operate in the developing world – calls into question how much of its historical outperformance has been down to stock picking within the members of the MSCI Emerging Markets index and how much has been down, certainly in recent years, to its weightings to companies outside of its benchmark.
Source: FE Analytics
That being said, Deverell notes that the weighting to developed world listed stocks has remained relatively small over recent years and therefore is not something he is concerned about.
“It is a good fund. I don’t think you need to worry about its weighting to companies listed in the developed markets because this is as emerging market fund. We have always felt where a company is listed means less than where is does its business,” Deverell (pictured) said.
Currently, emerging market-listed stocks make up 65 per cent of the fund while developed market names make up 27 per cent. The rest of the portfolio is invested in frontier markets.The other issue, which keen-eyed readers will have probably have noticed, is that the fund is hardly a hidden gem at £5bn.
However, Skagen points out that – unlike other fund groups – it doesn’t run any segregated mandates and therefore what you see is what you get with the fund’s AUM, instead of the group also managing multi-billion pound pension pots on the same strategy.
Landgraff adds that he has no issue with capacity at the moment.
“Your investment universe certainly becomes smaller the bigger your fund gets. That’s a fact, you can’t explain your way out of that one.”
“That being said, our flexible mandate does give us the benefit there as we can buy stocks listed outside of emerging markets. We don’t have a set limit, but would we want to be twice as big? Probably not.”
“Would it make a big difference to take on another billion or two? No, I don’t think so. However, if at some stage the size is a significant barrier to delivering the performance we want, then we would take the measures we would need to.”
The fund is now available on a number of platforms and is expected to appear on even more over the coming weeks. Its ongoing charges figure is relatively high, however, at 1.5 per cent.
