Genesis Emerging Markets, JP Morgan Emerging Markets and Advance Developing Markets are three trusts Numis Securities recommends for investors wanting access to emerging markets, an area the broker says offers very good value.
FE data shows the MSCI Emerging Markets index has lost some 10 per cent over five years, compared to 56.93 per cent return from the developed market-orientated MSCI World index.
Performance of indices over 5yrs
Source: FE Analytics
The once hugely-popular asset class has been hit by fears over China’s slowing growth, falling commodity prices and uncertainty over future US monetary policy – all of which have contributed to the index’s sharp falls over recent months.
The index is down 20 per cent since its peak this year, and while uncertainty continues to dog the asset class, a growing number of market commentators (such as Kames’ Stephen Jones) think emerging markets now offer very good value.
Developing world equities have already shown signs of improvement over the last few weeks and Sam Murphy – analyst at Numis – expects that trend to continue.
“Emerging markets valuations also look appealing relative to developed markets, trading at a 32 per cent discount on a P/E basis, versus an average of 21 per cent over the past 10 years,” he said.
“We believe there is potential for emerging markets to re-rate in time, with a rate rise in the US being a potential trigger. Unlike the ‘taper tantrum’ of 2013, when emerging markets were hit after the Fed announced a tapering of quantitative easing, a US interest rate rise has been well flagged and is unlikely to take markets by surprise.”
“While there may be volatility in markets initially, a step up in rates would indicate confidence in the US economy and may remove some of the uncertainty from emerging markets.”
Given that information, here Murphy highlights three investment trusts Numis is recommending in the IT Global Emerging Markets sector (which is currently trading on a 10 per cent discount to NAV).
Murphy says Numis has historically held Templeton Emerging Markets in high regard, but given the departure of Dr Mark Mobius and its poor performance over recent years, Numis think Genesis Emerging Markets is a better option now.
“We believe that it may be worth considering Genesis Emerging Markets (£632m market cap, 11.8 per cent discount) as an alternative – this fund is also managed through a bottom-up, value oriented approach and benefits from an experienced management team.”
“The portfolio is more diversified, with 140 to 170 holdings, and the current average holding period is seven years,” Murphy said.
The trust has been managed by Andrew Elder since January 2004. According to FE Analytics, it has returned 260.65 per cent over that time, beating its MSCI Emerging Markets benchmark by more than 60 percentage points in the process.
Performance of trust versus index under Elder
Source: FE Analytics
Genesis Emerging Markets has tended outperform in strongly rising markets, but has offered very little protection on the downside during falling markets such as 2008, 2011 and so far in 2015.
It is a highly diversified portfolio with over 40 countries represented. Elder’s largest regional weightings are to China, India and South Africa. The trust isn’t geared, has ongoing charges of 1.67 per cent and its discount to NAV is considerably wider than its one and three-year averages.
Next up on the list is Austin Forey’s JP Morgan Emerging Markets Investment Trust, which is currently trading on an 11.6 per cent discount (which is again wider than its one and three-year averages).
“We also favour JP Morgan Emerging Markets. Austin Forey has managed the fund since 1994 and takes a long-term approach seeking attractively valued companies which can generate value regardless of short-term economic or political developments,” Murphy said.
The JP Morgan Emerging Markets Investment Trust has been one of the sector’s best performers over the longer term. For example, it has gained 132.08 per cent over 10 years while the index is up 99.91 per cent.
Performance of trust versus index over 10yrs
Source: FE Analytics
It is also outperforming over rolling one, three and five-year periods having beaten its benchmark seven out of the last 10 calendar years – a feat which is almost unheard of the open-ended IA Global Emerging Markets sector.
India is Forey’s favoured market at the moment, with five of his top 10 holdings being listed in the country. In terms of sector’s, the manager has big bets on financials, information technology and consumer staples.
It is geared at 4 per cent and has ongoing charges of 1.17 per cent, though that doesn’t include a performance fee.
The final trust on the lists is Advance Developing Markets.
It is a fund of funds which is currently trading on an 11.8 per cent discount to NAV and has gone through a period of underperformance, but Murphy thinks its management has what it takes to turn things around.
“Advance Developing Markets has a good long-term record but performance has lagged behind in recent years, with asset allocation acting as a drag, despite strong performance from the underlying fund managers.”
According to FE Analytics, Advance Developing Markets has returned just 4.19 per cent since its launch in October 2009 compared to the sector and MSCI Emerging Markets gains of 15.97 per cent and 12.63 per cent, respectively.
Performance of trust versus sector and index since launch
Source: FE Analytics
Murphy added: “However, relative performance has improved since Bernard Moody and Andrew Lister took over as joint CIO and the recent acquisition of the management group by Aberdeen AM will provide a stable platform for the management team.”
The trust’s largest country overweights include India, Korea, Singapore, Russia and Turkey. Its top 10 include the likes of Edinburgh Dragon, Fidelity China Special Situations and the Schroder Asia Pacific Investment Trust.
Advance Developing Markets isn’t geared and has ongoing charges of 1.12 per cent.
