Funds with a high weighting to developing world economies have been the best hunting ground for investors over recent months as equity markets in the likes of China, Russia and Brazil have delivered stellar returns in a very short space of time.
Emerging markets, in aggregate, have been very out of favour over the last few years as concerns about slowing economic growth, geo-political tensions and the prospect of tighter monetary policy in the US have all weighed on returns and led to poor investor sentiment.
However, while those risks haven’t dissipated, certain emerging market funds are up close to 30 per cent in just the last four weeks.
There have been a number of reasons for this phenomenon. Firstly, Chinese equities – which make up a very large proportion of the index – have spiked as the Shanghai-Hong Kong Stock Connect has meant a wall of money has moved from the mainland over to the Hong Kong.
At the same time, weakened economic data has led many to believe that the Chinese central bank will be forced to further loosen monetary policy meaning more capital has flown into the market.
Outside of China, though, Russian and Brazilian equities – which had a torrid time last year largely thanks to the plunge in the oil price – have surged recently on the back of bombed-out valuations.
Performance of indices over 1 month
Source: FE Analytics
Clearly, however, it has been the strong performance of Chinese stocks which has been the major driver of the rally in the emerging market asset class.
According to FE Analytics, the IA China/Greater China sector is the best performing IA peer group so far in 2015 as the average fund has returned a hefty 24.57 per cent, mainly due to the sector’s 20.45 per cent return over the past month.
FE data also shows that the top performing 19 funds in the open-ended universe over the past month are all members of the IA China/Greater China sector.
The best performers have been HSBC GIF Chinese Equity, GAM Star China Equity and GS China Opportunity Portfolio and they have returned 29.16 per cent, 27.28 per cent and 26.34 per cent over that time.
The GAM fund has also been the sector’s best performing portfolio since its launch in July 2007 with returns of 276.93 per cent in sterling terms, beating its benchmark – the MSCI China index – by 175 percentage points in the process.
Performance of fund versus sector and index since Jul 2007
Source: FE Analytics
To illustrate the strength of the rally in China, the worst performing portfolio in the 37-strong sector – Aberdeen Global Chinese Equity – is still up 10.75 per cent over the past month meaning it has outperformed every fund from the IA UK All Companies, UK Equity Income and UK Smaller Companies sector over that time.
Guy Foster, head of research at Brewin Dolphin, says investors can expect this trend to continue – for the time being anyway.
“If bad news is good news then China's latest growth figures are a thing of beauty,” Foster said.
“Imports were marginally weaker than expected but much of that was of course down to movements in energy and commodity prices. What caught forecasters by surprise was the weakness in exports which contracted by 15 per cent when they had been expected to expand by 8 per cent.”
“The weakness implies that Q1 GDP, released Wednesday, will be soft. It also suggests that Chinese companies have been struggling with competitiveness as China has more or less tracked the dollar.”
Given that Chinese stocks have delivered such a strong return over such a short period of time and there are suggestions it is driven by “hot money” entering the market, FE Trustnet will look more closely at the outlook for the sector in an article later today.
Outside of China funds, portfolios which purely focus on Russia or the emerging Europe regions dominate the list of best performing funds over the last four weeks.
From a sector point of view, however, the IA Global Emerging Markets, Asia Pacific Inc Japan and Asia Pacific ex Japan sectors are among the five highest returning Investment Association peer groups over the last month as they have all gained around 10 per cent.
The best performing portfolio in the IA Global Emerging Markets sector has been the miniscule £4.9m FP HEXAM Global Emerging Markets fund with returns of 18.12 per cent – and it isn’t difficult to see why.
Data from FE Analytics shows that manager Bryan Collings has big overweights in China, Korea, Brazil and Russia relative to his benchmark.
The fund’s unit price has come from a very low base, however, as FP HEXAM Global Emerging Markets was a bottom decile performer in the sector in 2010, 2011, 2012, 2013 and 2014 and is the sector’s worst performing portfolio over five years with losses of more than 40 per cent.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
One interesting takeaway from the performance of emerging markets funds is that three of the top 10 highest-returning portfolios over the last month are trackers, while only two-thirds of active funds within the peer group have managed to beat the MSCI Emerging Market Index’s return of 11.71 per cent over that short period of time.
It is a similar situation in the IA Asia Pacific ex Japan sector, where less than 30 per cent of the peer group has managed to beat the MSCI AC Asia Pacific ex Japan index’s gains of 11.16 per cent over one month.
Of course, it is only a very short period of time but those underperformers include the funds managed by First State and Aberdeen, which typically focus on quality companies with reliable earnings. They have all massively outperformed over the longer term as a result of that approach, though.
The funds which top the sector, however, are CF Canlife Asia Pacific, GAM Star Asian Equity and BlackRock Asian Special Situations, which are all either overweight mainland China or Hong Kong.