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The emerging markets funds hoovering up Aberdeen’s outflows

24 July 2015

The emerging market specialist has suffered huge redemptions from investors, which it says have been due a broader move away from the region by investors, but not all funds in the space have been shedding cash.

By Daniel Lanyon,

Reporter, FE Trustnet

The likes of Lazard Emerging Markets and First State Asia Pacific Leaders are among the emerging market and Asia Pacific funds scooping up some of the billions of pounds of outflows from fund group Aberdeen, research by FE Trustnet suggests.

Over the past year Aberdeen Asset Management has lost tens of billions to redemptions with more than £1bn coming out of just two funds – the now £1.6bn Aberdeen Global Asia Pacific Equity and £4.7bn Aberdeen Global Emerging Markets Equity funds.

The news yesterday that just under £10bn has flowed out of Aberdeen’s funds in the past three months sent its share price plummeting down 7.4 per cent. The stock is also down further this morning.


Performance of stock over 3 months


Source: FE Analytics

For most of the last 10 years, funds and investment trusts run by Aberdeen have been some of the most popular options for many investors looking for exposure to the Asia Pacific ex Japan and wider emerging markets regions due to their focus on high quality companies and strong track records.

Both funds are managed with a ‘team based approach’. Hugh Young (pictured) leads the firm’s Asian investment team and was recently given a broad role overseeing all asset classes; Devan Kaloo is head of emerging market equities and has been named global head of equities, which was previously held by Young.

While Aberdeen’s popularity and strong performance is evident over the longer term, in more recent years portfolios run by Kaloo’s team have somewhat struggled relative to both their rivals and respective benchmarks.

According to FE Analytics, the Aberdeen Global Emerging Markets Equity fund shows clear outperformance since launch in 2006 but a rapid fall in relative performance is noticeable more recently. Over five years it is top quartile while over three years it is bottom quartile.





Performance of fund, sector and index since 2006



Source: FE Analytics

In emerging markets’ broader sell-off over the past year, the fund has fared worse than both its sector and benchmark with a 5.29 per cent loss compared to the 3.6 per cent index fall – somewhat unexpected given the team at Aberdeen’s focus on quality firms that are at the forefront of the region’s emerging dividend paying culture.

Our data show that outflows over the past year were just over £551m for the Aberdeen Global Emerging Markets Equity fund and £648m for Aberdeen Asia Pacific Equity. In both cases, the majority of this came in the past six months.

While the two Aberdeen funds were busy selling down stocks to meet redemptions, the likes of Lazard Emerging Markets and PFS Somerset Emerging Markets Dividend Growth, in the IA Global Emerging Markets sector, have seen the most inflows – taking £300m and £222m respectively over the past year.

Both funds have outperformed over the longer term. The £800m Lazard Emerging Markets has been managed by James Donald from New York since 1997. He has top quartile returns over 10 years but has slightly underperformed the benchmark over five years. 

The fund has a wider geographical spread than many funds, with large positions across Asia, Latin America, emerging Europe and the Middle East and North Africa. However Donald appears to have suffered somewhat from positions in China and Brazil, which have had a more torrid time of late.

Ben Willis, head of research at Whitechurch Securities, used to invest with Donald but when the fund soft-closed a few years ago he moved elsewhere. It has since re-opened.

“It was one of our core positions in emerging markets but when people close funds it becomes a real headache. We haven't re-looked at buying back it yet as it has fallen of the radar,” he said.

“We like Donald's process and his value bias rather than a growth bias, which lends itself towards contrarianism. It is not like an Aberdeen or First State and we appreciate that there are periods when it won't outperform. He was doing really well until they soft closed. He is not really at the larger end of the market and focuses mainly on smaller companies [compares to Aberdeen and First State].”


PFS Somerset Emerging Markets Dividend Growth, managed by Ed Lam since 2010, has fared better over this period and is top quartile over one, three and five years.

Performance of funds, sector and benchmark over 5yrs


Source: FE Analytics

The FE Research team, which has included the fund in the FE Select 100, back Lam’s outperformance and notes its lower risk profile than many peers in the sector.

“This focus on dividend growth was developed after the team were caught out by unexpected falls in companies’ earnings in 2007,” the team said.

“They believe this approach is appropriate for emerging markets, given the extra corporate governance risks. The performance so far bears this out, but investors should be aware the yield could remain low thanks to this strategy.”

“This fund is set up for the long term, however, so the team is willing to buy companies with low dividends in relatively new industries and hold for years as they develop.”

However, the team adds that the fund applies a dilution levy – a small fee on investors when they buy or sell, designed to cover dealing costs.

“We think the fund is still a good choice despite this extra cost making it one of the most expensive funds in the sector,” our analysts added.

In the IA Asia Pacific Excluding Japan sector, Aberdeen’s big rival the £8bn First State Asia Pacific Leaders fund gained the most fresh cash over the past year with net inflows of £500m, while the £300m Baillie Gifford Pacific fund attracted the second most at £205m.

The two funds have built up strong track records, with both sitting in the peer group’s first quartile over three, five and ten-year periods. First State Asia Pacific Leaders has made 250.64per cent over the past decade with Baillie Gifford Pacific has returned 184.62 per cent; their average peer made 142.65 per cent.

Both are ahead of Aberdeen’s offering over three, five and ten years – as well as over the one-year period when the Aberdeen fund has had to cope with strong outflows.


John Greenwood, chief economist at Invesco Perpetual, notes that among the emerging market economies, the ‘big four’ of China, India, Brazil and Russia have all been slowing or are in near-recession, which has put pressure on large parts of their respective equity markets.

This could explain some of Aberdeen’s vast outflows, which it says has been partly due to a wholesale move away from the asset class by investors this year.

“China’s domestic equity markets have experienced an extraordinary surge based mainly on expectations of easing monetary policy, and more recently an overdue fall. Elsewhere in the emerging markets arena, growth has remained weak, notably in East Asia, Eastern Europe and Latin America, due either to the stagnation in world trade and/or continued weakness in commodity prices,” Greenwood said.

“The slowdown in global trade has restrained export-led growth, and with a few exceptions, this has not yet been substituted with strong domestic-led investment and consumption spending.”

 

 

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