A combination of headwinds including an impending rate rise from the Federal Reserve, the growth slowdown and subsequent market sell-off in China, and the collapse of commodity prices have all made the idea of investing in emerging markets unpalatable for a lot of investors.
Performance of indices in 2015
Source: FE Analytics
However, more contrarian investors would argue that buying during market dips provides attractive value opportunities and there is also an argument for holding underperforming funds alongside outperformers in the hope of achieving smoother returns throughout various stages of a cycle. 
Not only this, Psigma’s Tom Becket (pictured) argues that if the Federal Reserve is still worried about global growth following its decision to delay rate hikes, it could be a challenging environment for regions across the globe and not just for emerging markets.
“I know I will get shouted at, but I am leaning towards the view that the rally since the August lows in the US and UK was the first of a ‘bear market rallies’ which faltered last week. This plays entirely into our ‘sell the rallies’ mentality,” he said.
“The reasons why emerging markets equities have underperformed should start to ease and when markets settle down, we would expect a period of strong outperformance from certain EM equity and debt markets. In the short term it is hard to imagine EM equities rallying, unless the omnipotent US market starts to improve.”
In light of this, a panel of investment professionals give us their contrarian emerging market fund picks, which they believe will provide stellar long-term returns and could be set to outperform during an emerging market rally in the future.
Jupiter Global Emerging Markets
Managed by Ross Teverson since the start of the year, this four FE Crown-rated fund has underperformed its sector average and benchmark by 3.28 and 3.19 percentage points respectively over the manager’s short tenure.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
However, Apollo’s Ryan Hughes notes that, before taking over the helm of the fund from Kathryn Langridge, Teverson delivered a stellar performance when he managed Standard Life Global Emerging Markets Equity Unconstrained. This outperformed its MSCI Emerging Markets benchmark by more than five times over his tenure.
“Ross did very well indeed at Standard Life – he has a really good track record, and last year he joined Jupiter to turn the fund around, re-structure its team and implement his process,” Hughes explained.
“He took over quite a small fund, it was nice and nimble, and he certainly proved while he was at Standard Life that he could really deliver during good times for emerging markets and outperform on the upside.”
“I think the fact he has now moved to Jupiter and he can put his own process in place bodes well. Not only can he be nimble, he can also be quite aggressively different to the benchmark, so that would stand him in good stead to outperform during an emerging markets rally.”
The £20.4m fund has almost a 50 per cent weighting in stocks within the Pacific Basin, an 11.78 per cent weighting in Asia Pacific, 11.52 per cent in the Middle East and Africa and a 9.94 per cent in the Americas.
Jupiter Global Emerging Markets has a clean ongoing charges figure (OCF) of 1.13 per cent.
Newton Global Emerging Markets
“Picking a good emerging market fund has been difficult in recent years,” Chelsea Financial’s Darius McDermott said.
“Far too many funds have stayed close to their benchmarks, investing in the large mega-cap state-owned enterprises. This is disappointing given emerging markets’ potential for change. Luckily, fund groups seem to be getting the message and there are a number of exciting new funds and managers.”
One fund that the managing director particularly likes is Newton Global Emerging Markets, which has been managed by Rob Marshall-Lee since 2011 and uses Newton’s in-house thematic approach.
Heavily geared towards consumer and internet stocks, the fund also only has 1 per cent in state-owned holdings, which is another reason that McDermott believes the fund could outperform during a rally.
Over the past two years, which have been a tricky time for emerging markets, the five FE Crown-rated fund has returned 2.1 per cent, outperforming its benchmark and peer average around five times over.
Performance of fund vs sector and benchmark over 2yrs
Source: FE Analytics
It has also achieved a top-decile alpha ratio, which measures performance in excess of the benchmark, and a top-decile Sharpe ratio, which measures risk-adjusted return.
Newton Global Emerging Markets has a clean OCF of 0.95 per cent.
Another fund that McDermott believes will be a strong performer in future years is GLG Unconstrained Emerging Markets, which is due to launch in October and will be managed by Simon Pickard and Edward Cole, who joined Man GLG from Carmignac in May this year.
Simon Evan-Cook, multi-asset manager at Premier, has been increasing his exposure to Latin America recently, and he has just bought the offshore HMG Global Emerging Markets fund, which was launched by Marc Girault and Paul Girault at the end of last year.
The €10.8m fund, which is owned by Goodhart Partners, has a significant weighting in Latin American countries, which is one of the reasons the fund appeals to Evan-Cook.
It has underperformed its peer average by 11.93 percentage points and its benchmark by 11.79 percentage points since its launch in November last year, having lost 26.9 per cent, but this has not deterred the multi-manager.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“The fund has a very niche way of investing in the emerging market subsidiaries of developed market companies,” Evan-Cook said.
“We bought it very much as a contrarian pick because the performance this year has been poor – it’s been hit by having a large exposure to Latin America and it’s been poor since it launched about seven or eight months ago.”
“But, we’ve done the work and we have met the managers on this fund who are very experienced and very contrarian. It’s not really correlated to another other particular market and it seemed like a very good entry point because of its performance.”
The fund has low turnover and focuses on quality and value stocks, which the managers believe significantly reduces portfolio volatility and downside risk.
HMG Global Emerging Markets has a clean OCF of 1.9 per cent.
Fidelity Institutional Emerging Markets
Tilney Bestinvest’s Jason Hollands is favouring emerging market funds that pursue a more cautious approach, which he says has worked relatively well in the current tough climate.
“A fund I would be flagging for the future is Fidelity Institutional Emerging Markets, managed by Nick Price, who is supported by 50 analysts covering emerging markets,” he said.
This fund is arguably suited to cautious investors, as it has delivered a top-decile Sharpe ratio and a top-quartile maximum drawdown, which measures the money lost if you had bought and sold the fund at the worst possible times, over Price’s tenure.
However, the fund has by no means compromised on performance in exchange for a smoother ride, as it has more than tripled its sector average over the same time frame.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
The fund currently holds only 2.6 per cent in the Americas, and has its largest weighting in the Pacific Basin at 46.7 per cent. Its next largest weightings are in South Africa at 17.7 per cent, Asia Pacific at 14.5 per cent and North America at 8.1 per cent.
Fidelity Institutional Emerging Markets, which is $161m in size, has a clean OCF of 1.07 per cent.
