More than 90 per cent of funds in the IA Global Emerging Markets sector have made a loss over 2015 so far as investor sentiment remains weak, but FE Analytics shows a handful of portfolios have managed to remain in positive territory.
Since the start of the year, the MSCI Emerging Markets index has dropped 4.26 per cent while the average emerging markets fund has had a worse time with a 4.78 per cent fall. The reasons for this include concern over the Federal Reserve’s first rate hike and the strong sell-off in the Chinese equity market.
Emerging markets had a strong start to the year with the index and sector rising around 15 per cent before, as the graph below shows, selling off heavily since the middle of April.
Performance of sector and index over 2015
Source: FE Analytics
It’s not just over recent months that emerging markets have suffered, however.
The developed market-focused MSCI World outperformed the MSCI Emerging Markets in 2014, 2013 and 2011 as investors jumped on the back of quantitative easing-driven rallies in the US, UK, Europe and Japan at the same time fears were growing around a ‘hard landing’ in China.
Our data shows that the MSCI Emerging Markets index is up just 1.34 per cent over three years and 2.40 per cent over five years; in the MSCI World index these gains are a respective 43.59 per cent and 63.74 per cent.
While aversion to emerging markets has mounted this year as many expect the Fed to make its first interest rate hike in September, not all are convinced that the asset class is set to remain under further pressure.
John Higgins, chief markets economist at Capital Economics, said: “Emerging market financial markets have come under stress once again in recent weeks as interest rate hikes in the US loom large on the horizon.”
“Markets in the emerging world feel like a one-way bet at the moment and there may be some further losses in the coming weeks in anticipation of Fed lift off. But from a valuation point of view at least, further heavy losses are not justified and therefore unlikely to be sustained over the medium term.”
Against this backdrop, funds in the IA Global Emerging Markets sector have found it hard to make positive progress. FE Analytics shows that 76 of the 83 members of the peer group – or 91.6 per cent –posted a negative return in the first seven months of 2015.
Of the seven that have made a gain, Carmignac Ptf Emerging Discovery leads the pack with an 8.49 per cent total return.
The five FE Crown-rated fund, which is managed by Xavier Hovasse and David Young Park, is up more than 25 per cent over three years, aided by a 14.02 per cent gain in 2014 when its average peer made just 3.19 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund focus on small and mid-caps in emerging markets offers the potential for significant outperformance but also creates the risk of being hit harder when there is a strong reversal of sentiment towards the asset class. In 2011, for example, the fund lost 21.17 per cent when the MSCI Emerging Markets index was down 17.82 per cent.
Carmignac Ptf Emerging Discovery has also one-fifth of assets in the consumer staples sector, with another 18.6 per cent in consumer discretionary and 17.7 per cent in financials. Part of its strong performance year to date, however, is down to its use of hedges on the Chinese A share market – which rallied significantly only to suffer a sustained sell-off in the second quarter.
This strategy means that the Carmignac fund is well ahead of the other emerging market portfolios that have made a positive return this year. Goldman Sachs Growth & Emerging Markets Broad Equity Portfolio, the fund in second place, is up just 1.83 per cent while JPM Emerging Markets Small Cap has made 1.62 per cent.
Candriam Equities L Sustainable Emerging Markets has made 1.05, Templeton Emerging Markets Smaller Companies 0.63 per cent and Hermes Global Emerging Markets 0.35 per cent. The remaining fund is Neptune Emerging Markets, where the total return over the year’s first seven months is 0 per cent.
Mark Mobius’ Templeton Global Emerging Markets, on the other hand, sits at the bottom of the table after making a 10.94 per cent loss. The portfolio is overweight Brazil, which has endured a tough few years on the back of a recession, high inflation and the country’s biggest-ever corruption scandal thanks to Petrobras.
The one crown-rated fund is currently the lowest returning fund in the sector over one, three and five years, with five-year losses amounting to 35.15 per cent. It has turned in bottom decile performance numbers during 2011, 2012, 2013 and 2014.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The other emerging market portfolios sitting at the bottom of 2015’s performance table include Oyster Emerging Opportunities, down 9.22 per cent; BlackRock Emerging Markets, down 8.83 per cent; and Schroder ISF QEP Global Emerging Markets, down 8.83 per cent.
