Having been one of the dominant forces in the emerging markets space over the long term, it is fair to say that the highly rated Aberdeen Emerging Markets Equity fund has gone through an unpleasant time over recent years. 
The fund, which is headed up by Devan Kaloo (pictured) and his well-respected team, had (along with First State’s offering) been one of the leading lights in the sector thanks to its focus on high-quality companies with reliable earnings.
Its strong past performance is still borne out in the data, of course, as FE Analytics shows Aberdeen Emerging Markets Equity is the best performing IA Global Emerging Markets portfolio over 10, 15 and 20 years.
Performance of fund versus sector over 15yrs
Source: FE Analytics
On top of that, it has been the only fund to have beaten the sector average and the MSCI Emerging Markets in seven out of the last 10 calendar years.
This strong performance led to substantial inflows (as well as the money which was going into the strategy via segregated mandates) and the fund’s AUM peaked at £4.1bn in April 2013 when the group took the decision to soft-close the portfolio.
Concerns had already been raised about the size and there were worries that its highly-profitable strategy would go through a period of underperformance as growth rates in emerging markets started to slow.
One of the most vocal critics we spoke to at the time was Premier’s Simon Evan-Cook, who had been a unitholder but sold his stake due to capacity issues. Looking back, he was glad he made the decision.
“We sold in March which was just before they soft-closed the fund and that was the tip of the iceberg for us,” Evan-Cook said.
“It was the straw the broke the camel’s back as the growth style in emerging markets (in which Aberdeen was the poster child) had done particularly well and the fact that they had taken on so much money made us uncomfortable.”
“When you are running that amount of money you have nowhere to hide because if you were running a smaller fund you can still find quality growth stocks that haven’t been swept away by the flow of money.”
“When you are running a super-tanker like that, if the style takes a bath, you have to take a bath as well.”
Evan-Cook’s decision to sell couldn’t have come at a better time.
According to FE Analytics, since the soft-closure Aberdeen Emerging Markets has been among the 10 worst performers in the sector with losses of 10 per cent – meaning it has fallen four times further than its benchmark.
Performance of fund versus sector and index since soft-closure
Source: FE Analytics
Evan-Cook certainly wasn’t alone in selling the fund. FE data shows Aberdeen Emerging Markets Equity’s AUM has more than halved since its closure to just £1.7bn. That figure includes capital losses, but our data shows it has also been among the 20 funds shedding the most money over the past 12 months.
A number of reasons, other than size, have been given for its lacklustre performance.
“It is on a regional basis that Aberdeen have been hit. For example in the first half of this year, Brazil and India exposure has hurt and they have had an underweight exposure to the strong rally in China,” Gavin Haynes, managing director at Whitechurch, said.
Many, though, warn that the fund’s quality growth style has been a major factor and, worst of all, that the underperformance is likely to continue as the approach is unlikely to be as profitable as it has been in the past given that emerging market economies are now embarking on different growth trajectories.
This argument is supported by Old Mutual’s John Ventre, who is avoiding the likes of Aberdeen and First State in his funds of funds as a result.
“In the context of a ‘de-emerging markets’ theme and as the growth outlook looks a lot less certain, while at the same time valuations looks really compelling, it turns the usual manager selection on its head,” Ventre said.
He added: “The very successful quality growth managers out there in the market, which we have owned historically, are probably not best positioned to capture the new dynamic in emerging markets.”
Ventre therefore says investors now need to focus on value in emerging markets, likes the approach implemented by Hermes’ Jonathan Pines.
The manager’s focus on value leads him to stocks which others feel are poor quality, but it means his now closed $2bn Hermes Asia ex Japan fund has been the best performing portfolio in the IA Asia Pacific ex Japan sector since its launch in November 2012.
As the graph below shows, it has also beaten Hugh Young’s Aberdeen Asia Pacific Equity fund (which is managed along the same lines as Kaloo’s offering with a quality growth bias) by more than nine fold over that time.
Performance of funds versus sector and index since Nov 2012
Source: FE Analytics
So what should investors do Aberdeen Emerging Markets?
This is a different article to the some we have written in the past because if investors were to sell this fund, the soft-closure means they can’t get back without paying an initial fee. On top of that, the group has reiterated to the press that it has no plans to re-open the portfolio despite the substantial outflows.
While Evan-Cook is happy with his current exposure to emerging markets (which includes FE Alpha Manager Nick Price’s Fidelity FAST Emerging Markets fund) he says if investors have stuck with the fund over the last few years, this isn’t the best time to sell.
He doesn’t adhere to the argument that Aberdeen’s quality growth style will no longer work, but says investors may wish to pair the fund with a more value-orientated portfolio to cover the bases.
“If I was an investor in Aberdeen Emerging Markets and I had held it through the last couple of years, I would be optimistic that the worst was over. You could look back at the recent performance as a bit of a blip because it is still managed by a good quality team. If you were looking to hold for the next 10 years, I wouldn’t sell,” he said.
His views are echoed by Haynes.
“The fund has had a difficult time since it was soft closed and AUM have more than halved,” Haynes said.
“Going forward the smaller fund may prove easier to manage from a liquidity perspective. I still rate the team at Aberdeen very highly and for investors taking a long-term view and wanting core exposure to emerging markets I would hold this fund.”
Rob Morgan, pension and investment analyst at Charles Stanley Direct, agrees with Haynes and Evan-Cook that investors would be wrong to sell (and in effect be locked out) now.
However, he also doesn’t warm to the view that value strategies are the best going forward either, given the clear risks facing emerging markets in the form of slowing Chinese growth and concerns about its economy, falling commodity prices and the potential for tighter monetary policy in the US.
Therefore, he says investors who are already in the fund should consider buying more.
“It’s been such a poor period for Aberdeen that I can’t help feeling that selling now is shutting the stable door after the horse is bolted, though,” Morgan said.
“I am also generally nervous of ‘value’ strategies in emerging markets. There are lots of companies that are cheap for good reason – government intervention, poor corporate governance, opaque structures, etc – so I think that the Aberdeen/First State focus on quality is actually the way to go for the long term and produces a better risk return profile.”
