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Does a lack of quality mean regional emerging funds can come to the fore?

07 March 2015

Many investors hold emerging market funds as a means of diversification. However, should they be worried about the overall quality of the sector?

By Lauren Mason,

Reporter, FE Trustnet

Over the past few months headlines about the price of oil, the rising US dollar and the Greek bailout have been dominating the news. All of which will have massive impacts on global markets, of course, but have these events overshadowed what is happening in some emerging markets at the moment?

Robert Horrocks, Matthews Asia’s chief investment officer, said: “Although any one of these issues have the potential to cause short-term shocks, ultimately what happens in Asia is not going to be decided by these short-term fluctuations.” 

“For me, value will be created in companies over the long term if growth is fast and companies are sustainable and efficient. And when I look down from a macroeconomic view, Asia seems to be doing quite well since the global financial crisis on the sorts ofmetricsthat should go hand-in-hand with this kind of corporate growth. 

“First, though it is highly unfashionable to say so in this world of countries operating below potential, it is savings that drives long-term growth. China saves nearly 50 per cent of GDP, and Singapore 46 per cent. Indeed, the Philippines – which is the MSCI All Country Asia Pacific Index member country with the lowest gross savings rate of 22 per cent – has a higher savings rate than France, the US, the UK and much of Latin America.

In the last week, there has been some positive news for investors in emerging markets. On Wednesday, India’s central bank surprised markets by announcing a cut in its key interest rates for the second time this year. This move echoed steps made by China just days before, after its central bank reduced interest rates for the second time in three months in an attempt to stimulate the economy.

However, while many investors will be rejoicing at this news, there are many other countries under the emerging market umbrella that aren’t faring quite as well.

Bill McQuaker (pictured), the head of Henderson’s multimanager team, said: “If you look at elements of the global story at the moment such as the fall in oil prices and the global tax cut, there are a few economies that will suffer. Russia, the Middle East, Venezuela, Nigeria and other big oil exporting economies are not going to benefit from this.” 

This can leave investors confused as to whether investing in emerging markets is a good idea or not, especially if they view the asset class on a global basis. 

Apollo Multi-Asset’s Ryan Hughes said: “Historically, people have viewed emerging markets as one holistic asset class and that if you buy just one fund, it gives you emerging markets in your portfolio. But obviously emerging markets cover so many different countries, regions, economic profiles and company profiles.

“I think because of this, we’re now probably at a tipping point where it’s appropriate for there to be emerging Asia funds, Latin America funds, emerging Europe funds and for investors to start thinking about the regions independent of each other rather than just call them all ‘emerging markets’.”

He explained that if investors are buying funds that closely resemble the index and are broad-based and global without differentiating, they are not necessarily getting the exposure they want. 


Ben Willis, head of research at Whitechurch Securities, notes that this past interest in the global emerging markets story has led to several successful funds with long-term track records closing their doors to new money. Notable examples include flagship funds from Aberdeen and First State

He said: “Some have subsequently re-opened but investors naturally ask – for how long?”

“This creates a problem. Emerging market funds are relatively volatile and therefore risky, and so funds that have produced good relative returns through several cycles are sought after as they offer a measure of security.” 

“I therefore wouldn’t necessarily say there was a lack of quality within the EM sector, more a lack of choice.”

Adrian Lowcock, head of investing at Axa Wealth, also acknowledges that as the Aberdeen and First State funds are closed to new money, this has left room for new managers to attract investors.

He says that a big problem with emerging markets fund, aside from their size, is their ability to protect capital. 

“Managers have proven they can make money in a rising market but they come unstuck in a falling market,” Lowcock explained. 

“Capital preservation is the critical factor for long-term successful investment in emerging markets.  On the whole, few managers have been able to achieve this as it requires a long-term focus and the ability to accept that you may well lag behind peers in a rising market.”   

“However, this is also a sign of the nature of the market as emerging markets tend to be more volatile and therefore fund performance can be volatile than in other sectors.”

Lowcock said that the sector itself has been monopolised by Aberdeen and First State, who he believes to be excellent at long-term capital preservation as an investment strategy.

Mona Shah, senior research analyst and assistant fund manager at Rathbones, agrees. She added: “The likes of First State and Aberdeen have dominated for a number of years, owing to their high quality bias and very overweight position on the consumer – biases that have endeared investors to emerging markets.”

“It’s less of a question of lack of quality, more one of perception.”


Given that the obvious choices in the global emerging market space seem to be limited, some investors choose to allocate to regional or single country emerging market funds.

Hughes said: “We’ve had quite a lot of exposure to emerging Asia instead and we’ve done this on the grounds that emerging Asia looked very cheap on a valuation basis.”

“China looked cheap and in many respects looked over-sold a few months ago, and now obviously the market’s done very well. Korea was also a market that, to us last year, looked very cheap and continues to look cheap. We’ve accessed these elements of Asia through Hermes Asia ex Japan, Prusik Asia and Matthews Pacific Tiger.”

Hughes adds that these funds provide a welcome mix of styles and a good geographical spread across Asia, providing exposure to both emerging Asia and traditional broad-based Asia.

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