PFS Somerset Emerging Markets Small Cap, Carmignac Ptf Emerging Discovery and Newton Emerging Income have been less risky than the FTSE 100 over recent years, according to FE’s analysis, despite focusing on an asset class that is more volatile than UK equities.
Emerging markets offer the potential for higher long-term gains than stock markets in the developed world, although those come with a much rougher ride. Our data shows that the MSCI Emerging Markets index has made 264.31 per cent over the past 15 years while developed market-focused MSCI World is up 82.43 per cent.
Our volatility data for emerging markets only goes back 10 years but shows the MSCI Emerging Markets’ annualised volatility over this time has been 20.69 per cent while it’s just 13.86 per cent for the MSCI World.
When it comes to maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – emerging markets’ was 45.36 per cent while the MSCI World’s was 33.21 per cent.
Performance of indices over 15yrs
Source: FE Analytics
In the IA Global Emerging Markets sector, the average fund has behaved in much the same way as the index. Over 10 years, annualised volatility has been 20.17 per cent while the average fund suffered a 43.98 per cent maximum drawdown.
However, there are funds within the sector that have been less risky than the above figures would lead investors to believe, although it must be kept in mind that past performance is no guide to the future.
The FE Risk Score tool seeks to offer a guide as to which funds are more or less risky than the FTSE 100. The tool defines risk as a measure of volatility relative to the FTSE 100 index, with a score below 100 meaning the fund has been less risky than blue-chip index over rolling three-year periods.
Using this tool, we can see that the IA Global Emerging Markets member with the lowest risk has been Mark Asquith and Edward Robertson’s PFS Somerset Emerging Markets Small Cap fund, which has an FE Risk Score of just 81.
Source: FE Analytics
The fund sits in the sector’s first quartile over three years with an 11.98 per cent gain, while its annualised volatility of 11.55 per cent is among the peer group’s lowest. Asquith and Robertson have extensive experience in emerging markets, having worked at specialist boutique Lloyd George Management before setting up Somerset.
It has its largest geographic weighting to Taiwan, at 15.6 per cent of assets, followed by India (15.4 per cent), South Africa (11.6 per cent), Malaysia (8 per cent) and Turkey (7.5 per cent). The Philippines’ Security Bank, Taiwan’s Sinmag Equipment and Poland’s Warsaw Stock Exchange are the three largest holdings.
Performance of fund vs sector and index since launch
Source: FE Analytics
As the previous table shows, many of the funds with the lowest risk scores are those that focus on stocks lower down the market cap spectrum, which is usually seen as a higher risk part of the market. However, we recently looked at how some UK small-cap funds have been less risky than the FTSE 100 over recent years.
With emerging markets, there may be another factor at play. Small-caps in the developing world have a limited coverage and are often an overlooked area by most investors, meaning less ‘hot’ money goes into this part of the market and the risk of significant outflows when sentiment shifts is reduced. It’s also less likely for ETFs to be able to move the market.
Of the five small-cap funds on the list of the 10 least risky emerging market funds, four of them hold the top five FE Crowns for superior performance in recent years when it comes to stock-picking, consistency and risk control.
These are PFS Somerset Emerging Markets Small Cap, Carmignac Ptf Emerging Discovery, Templeton Emerging Markets Smaller Companies and JPM Emerging Markets Small Cap.
Equity income is also a theme in the list of least risky funds, with three members – PFS Somerset Emerging Markets Dividend Growth, Newton Emerging Income and Polar Capital Emerging Markets Income – taking this approach.
Of the two funds with a long enough track record, the Somerset portfolio has outperformed both the sector and MSCI Emerging Markets index over the past three years, while the Polar Capital fund lags. Both have posted less volatility than the sector and index.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Of course, not all members of the sector have been less risky than the FTSE 100 with 59 funds out of a possible 76 having an FE Risk Score above 100.
FP Henderson Rowe FTSE RAFI Emerging Markets has the highest score at 137. Our data shows the fund made fourth-quartile returns in 2012, 2013 and 2014 as well as over the year to date.
Lazard Developing Markets, Neptune Emerging Markets and NFU Mutual Global Emerging Markets also have FE Risk Scores of 120 or higher and all sit in the bottom quartile over three years.
Some are showing signs of an uptick, however, with Neptune Emerging Markets now in the top quartile over three months, six months and one year.
