As a result of slowing economic growth in China, falling commodity prices and geo-political tensions, emerging market equities have lagged their developed market peers over recent years. Though emerging market funds saw somewhat of a revival earlier this year, concerns about the impact of tighter monetary policy in the US meant the rally was not sustainable.
It means that, according to FE Analytics, the MSCI Emerging Markets index is up 6 per cent in 2014 which is roughly half the MSCI AC World Index’s return year to date.
However, the Schroders survey shows advisers are planning to increase their clients weighting to the developing world next year in expectation of decent returns. With that in mind, and as the survey revealed that FE has become the most popular ratings agency with advisers, we look at four of FE’s top-rated emerging markets funds.
All of the below are members of the FE Select 100, hold five FE Crowns and are run by an FE Alpha Manager. They come from the IMA Global Emerging Market or Asia Pacific ex Japan sectors, with one from the Specialist peer group.
Somerset Emerging Markets Dividend Growth
Though it doesn’t have the longest of track records, the £805m Somerset Emerging Markets Dividend Growth fund is one of the FE Research team’s favourites in the IMA Global Emerging Markets sector.
According to FE Analytics, the fund – which is headed-up by FE Alpha Manager Ed Lam – has been the sector’s second best performer since its launch in March 2010 with returns of 29.91 per cent. Its MSCI Emerging Markets benchmark has returned 6.12 per cent over that time.
Performance of fund vs sector and index since Mar 2010
Source: FE Analytics
It has also outperformed both the sector and its benchmark in each calendar year since launch and is top quartile again in 2014.
“This fund is one of a small number in its sector to play the dividend card,” Thomas McMahon, fund analyst at FE Research, said.
“This is a process we like and it has proved its value in several different environments. It is interesting to note that the team, which has spent its entire career working on emerging markets, built this process after being caught out by earnings downgrades in 2007.”
“This proves it has learnt from its mistakes, resulting in a stronger selection method that has worked so far on this portfolio.”
It is a concentrated portfolio of just 42 holdings, with Lam (pictured) favouring Korea and India while largely avoiding Chinese equities. Lam also holds 11 per cent in cash due to his cautious outlook.
The fund has a yield of 2.4 per cent and an ongoing charges figure (OCF) of 1.33 per cent.
First State Asia Pacific Leaders
First State, as a group, is a powerhouse in emerging market equities and its £8bn Asia Pacific Leaders fund is one of the few offerings that are still available to UK investors.
It is also very understandable as to why the fund, which focuses on high quality stocks, has such a large AUM.
Our data shows since its launch in December 2003 Angus Tulloch’s fund has been the second best performing portfolio in the IMA Asia Pacific ex Japan sector with returns of 380.91 per cent, beating its MSCI Asia Pacific ex Japan benchmark by close to 150 percentage points.
Performance of fund vs sector and index since Dec 2003
Source: FE Analytics
The fund has been a top quartile performer year to date due to the fact Tulloch, and his co-manager Richard Jones, have maintained a defensive portfolio and FE Research’s Charles Younes says investors can expect that positioning to continue.
“Tulloch (pictured) and Jones are likely to maintain a conservative stance, as they believe that taking on additional risk is unlikely to be rewarded in the current market,” Younes said.
“The managers are concerned about the longer term impact of quantitative easing and creation of bubbles in the Asia Pacific region. They continue to focus solely on companies with strong balance sheets and a business model they fully understand, which should maintain their high quality of risk control.”
“This approach should help the fund in uncertain markets, although it will lag behind if the global economy quickly recovers.”
First State Asia Pacific Leaders has an OCF of 0.91 per cent.
Fidelity Emerging Markets
Turning back to the global emerging markets sector, a number of large fund groups have tried to replicate First State and Aberdeen’s success over the years, though many of them have struggled to do so.
One which is making a good go of it, however, is Nick Price’s £750m Fidelity Emerging Markets fund.
It sits in the top quartile of the IMA Global Emerging Markets sector since launch in June 2010 with returns of more than 30 per cent, doubling the returns of the index in the process.
Performance of fund vs sector and index since Jun 2010
Source: FE Analytics
However, McMahon says investors should know that Price takes a very different approach to the market than the teams at Aberdeen and First State.
“Price makes unpopular and contrarian calls and runs a portfolio very different from his peers, so the fund is likely to go through periods of significant out and underperformance,” McMahon said.
This approach means the fund has struggled relative to both the sector and its benchmark in this year’s turbulent market.
McMahon added: “Price invests in the theme of growing consumer demand in emerging markets, particularly in the internet and electronic sectors. This means the fund will do well if and when those sectors do.”
“The fund has a large position in South Africa, often in companies selling into the rest of Africa. This leaves it exposed to the effects of the growing Ebola epidemic.”
Fidelity Emerging Markets is overweight Indian and South African equities and is underweight China, Hong Kong and Brazil. Its OCF is 1.03 per cent.
Fidelity Emerging Europe Middle East and Africa
Though it is a niche fund, Fidelity Emerging Europe Middle East and Africa is a good choice for those investors who want to add some spice to their portfolios, according to FE Research’s Amandine Thierree, though she says it should be only used on a long-term basis and as a satellite holding.
The £150m fund, which is also managed by Nick Price, invests in businesses with a dominant market position and a low level of debt. Thierree says this is an attractive approach to what is an often volatile part of the market.
“The focus on quality does not impede the search for cheap valuations,” she said.
“The team refuses to overpay for a stock and reckons there are enough price fluctuations in markets to allow it to buy when valuations are low. It is aware of the liquidity risk inherent to the EMEA region and only invests small amounts in companies where this is likely to be a problem.”
“The team has drawn parallels between Africa today and China 20 years ago, arguing demographics, technology and improving living conditions make a strong case for investment.”
According to FE Analytics, Price’s fund has returned 48 per cent since its launch in January 2008. As a point of comparison, the MSCI Emerging Markets EMEA index has lost 5 per cent over that period of time.
Performance of fund vs index since Jan 2008
Source: FE Analytics
Price is overweight South Africa, Nigeria and Kenya, which make up 56.2 per cent, 7.6 per cent and 2.6 per cent respectively of his portfolio. The fund has OCF of 1.31 per cent.
