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Rolling returns: The emerging market funds that stay on top over five-year periods

11 December 2014

A study by FE Trustnet shows that sector favourites Aberdeen and First State dominate when it comes to the emerging market funds that are first quartile over the highest number of rolling five-year time frames.

By Gary Jackson,

News Editor, FE Trustnet

Investors searching for emerging market funds that have a track record of sticking in their sector’s top quartile over five-year periods could struggle if they want options beyond the popular funds from Aberdeen and First State, research by FE Trustnet suggests.

The IMA Global Emerging Markets sector is one of those peer groups where outperformance is hard to come by. One of our recent studies showed that only one-third of large-cap emerging markets funds have outperformed the MSCI Emerging Markets index over five years.

In the next article in the series on rolling returns, FE Trustnet examines the IMA Global Emerging Markets sector to find out which funds have been able to stay top quartile over successive rolling five-year periods back to 2004.

Our study focuses on the six rolling five-year periods between 30 November 2004 and 30 November 2014 to determine which funds are first quartile in each period. Only funds with a 10-year track record were included in the study, although we included First State Global Emerging Markets Leaders even though it recently exited the sector

As the graph below shows, the average investor in an IMA Global Emerging Markets fund has outperformed the MSCI Emerging Markets over the 10 years covered by this study with a return of 184.82 per cent against the index’s 177.26 per cent.

Performance of sector and index over 10yrs

   
Source: FE Analytics

However, as can also be seen from the graph, the extent of this outperformance has tailed off in recent years as the asset class has come under increasing pressure from headwinds such as slowing economic growth in China, tighter monetary policy in the US and geo-political risk in several areas.

Our analysis of the sector shows Aberdeen Emerging Markets Equity and First State Global Emerging Markets Leaders funds are only funds of the 25 with a long enough track record in the sector to stay in the first quartile over all six rolling periods examined.

In cumulative terms, both funds have significantly outperformed the peer group average and the index over the 10 years covered by the study. The First State offering is up 317.95 per cent while Aberdeen’s has gained 298.34 per cent.

This makes Jonathan Asante and Tom Prew’s First State Global Emerging Markets Leaders the best performer out of all the funds in the sector, while Aberdeen Emerging Markets Equity is the second. It must be noted that past performance is no guide to future returns.


Performance of funds vs sector and index over 10yrs



Source: FE Analytics

Both funds are firm favourites with investors but their growing sizes - First State Global Emerging Markets Leaders’ assets peaked at £4.4bn while Aberdeen Emerging Markets Equity’s reached £4.1bn - led their managers to put initial charges on the portfolios to slow inflows.

Meanwhile, the First State fund’s high allocation to developed market stocks caused it to leave the peer group and enter the IMA Specialist sector at the start of the month. This may prove off-putting to investors wanting direct exposure in emerging markets.

Investors who want to look beyond these two funds have limited options in the IMA universe if they value consistent outperformance. As noted, no other funds in the IMA Global Emerging Markets sector have stayed in the top quartile over six rolling five-year periods.

Some have come close, however. James Donald’s £728.8m Lazard Emerging Markets fund stands out, as it is first quartile in five of the periods and second quartile in the one which spans November 2005 to November 2010.

Performance of funds vs sector and index over 10yrs



Source: FE Analytics

Donald applies an investment process that screens stocks on fundamentals such as return on equity, operating margin, price/earnings ratio and price/cash flow and seeks to add those that are trading on attractive valuations to the four FE Crown-rated fund.

The fund’s largest holding is Brazilian bank Banco do Brasil, which accounts for 3.8 per cent of the 80-stock portfolio, followed by Taiwan Semiconductor Manufacturing, China Construction Bank, Samsung Electronics and China Mobile,


Square Mile, the investment research consultancy, gives the fund an ‘AA’ rating and said: “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.”

Two funds have been in the top quartile for four of the rolling five year periods and second in the other two, FE Analytics shows. These are Richard Sneller's £561.4m Baillie Gifford Emerging Markets Growth fund and the team-managed £803.1m Dimensional Emerging Markets Core Equity fund.

Baillie Gifford Emerging Markets Growth is managed with a long-term perspective, using Baillie Gifford’s bottom-up investment philosophy that has a bias to growth. This approach has paid off over the long run, with the fund gaining 246.15 per cent over 10 years.

It largest holding is Taiwan Semiconductor Manufacturing Company at 5 per cent, followed by Samsung Electronics and Dragon Oil. China is the largest geographical weighting at 22.4 per cent, with South Korea accounting for 21.2 per cent.

Dimensional Emerging Markets Core Equity is up 214.38 per cent over the 10 years covered by the study. It uses an approach that sees “markets as an ally, not an adversary” and argues that attempting to capitalise on the market being wrong and attempting to predict the future is “costly and futile”.

Instead, the manager tries to “take advantage of the ways markets are right” by investing in stocks that are clear winners, noting that rewards more often than not head towards these companies. Its largest weighting is to South Korea followed by Taiwan and China.

Investors willing to look outside the IMA universe and buy offshore funds have two more options when it comes to those with a track record of staying in the top quartile over five years.

Danske Global Emerging Market, managed by Aberdeen’s Devan Kaloo, who heads the team in charge of the Aberdeen Emerging Markets Equity fund, is one. It’s up 213.10 per cent over 10 years.

The Genesis Emerging Markets Investment Company is the other after a 10-year cumulative return of 209.48 per cent. The fund invests with a five-year horizon and its biggest exposures to India, China and South Africa.
 

In the next article of the rolling returns series, FE Trustnet will look at regional funds specialising in areas such as Europe, Japan and the US to see if any are able to deliver consistent outperformance.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.