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FE Alpha Manager Chatfeild-Roberts won’t be buying new emerging market funds any time soon

16 October 2015

The manager of the Jupiter Merlin range says that the recent fall in emerging market equities haven’t tempted him to introduce any new names into his portfolio and reveals the one quality investors should seek in an emerging markets manager.

By Gary Jackson,

Editor, FE Trustnet

Signs of value are appearing in emerging market equities after their protracted sell-off but Jupiter’s John Chatfeild-Roberts is not planning on bringing any new funds into his Merlin multi-manager range to capitalise on this.

FE Alpha Manager Chatfeild-Roberts warns that emerging markets could still have further to fall despite their recent declines and adds that it is difficult to find new managers in the space who are worth backing.

Emerging markets have endured a rough couple of years and underperformed their developed market counterparts by a wide margin. FE Analytics shows the MSCI Emerging Markets index is down 11.50 per cent over five years, while developed market-focused MSCI World has posted a 55.25 per cent total return.

Performance of indices over 5yrs

 

Source: FE Analytics

As can be seen from the graph, emerging markets have suffered over 2015 – since 15 April, the index has dropped just over 20 per cent on the back of concerns about slowing Chinese economic growth, the devaluation of the yuan and the prospect of higher interest rates in the US.

The MSCI World, on the other hand, has had a more muted reaction to these worries and has fallen by around 10 per cent, despite starting the period on much richer valuations.

Chatfeild-Roberts, who runs Jupiter’s five-strong Merlin fund of funds range with fellow FE Alpha Manager Algy Smith-Maxwell, said: “Emerging markets are certainly looking cheaper but you have to remember that these kinds of trends can go on for a long time. We’re watching but not there yet.”

He illustrates this by saying he was recently re-reading a fund manager report on Latin America from July, where the manager was commenting on the strong currency falls in the region and was “getting really tempted by thinking things were quite good value”. The fund has already lost 17 per cent at that point but, despite the signs of value, is now down some 30 per cent.

“You have to quite careful when it comes to emerging markets. There’s an old joke from the tech crisis: What’s the definition of a stock that has fallen 90 per cent? It’s a stock that fell 80 per cent then halved. You have got to be careful when there’s wind in your face,” he added.

The Jupiter Merlin funds have been trimming emerging markets over the past 18 months or so after its exposure to this area of the market hampered performance and in light of the slowing growth in China, which will have negative consequences for neighbouring Asian countries and commodity exporters like Latin America.

However, its managers have maintained positions in three funds: First State Asia Pacific Leaders, Prusik Asian Equity Income and Findlay Park Latin American in three portfolios.


 

While the multi-manager is waiting to see how the situation in emerging markets pans out, he adds that he is most likely to increase exposure to an existing holding rather than introduce a new name.

The funds’ two Asian holdings have held up well during the turbulent conditions of 2015 and have outperformed the MSCI AC Asia Pacific ex Japan index, in sterling terms.

Performance of funds vs index over 2015

 

Source: FE Analytics

They’ve also done well over the longer term too. Since Prusik Asian Equity Income’s launch at the start of 2011 it has made 92.91 per cent while First State Asia Pacific Leaders has gained 30.32 per cent; the index is up just 4.16 per cent over this time.

Findlay Park Latin American, however, has lost 30.62 per cent over 2015 to date while the FTSE Latin America index is down 24.20 after China’s slowdown weighed on exporters, Brazil fell into recession and Petrobras became embroiled in an alleged corruption scandal.

Over longer time frames the fund looks better, as it’s up 43.46 per cent since launch in November 2011 while the FTSE Latin America (which is not its benchmark as the fund does not have one) has risen just 16.03 per cent.

However, Chatfeild-Roberts says he does not have a particularly long list of emerging market funds he would introduce to the Merlin portfolios if the outlook improved for the asset class.

“Generally speaking and there are exceptions, but there just aren’t that many really good emerging market fund managers out there,” he said. “We’re constantly turning the stones over to try and find new ones but we found that sticking with the people who actually know what is going on has been a pretty good strategy for us.”

FE Trustnet recently looked at the IA Global Emerging Markets sector and found that the promised long-term growth of the asset class has failed to appear in general. One 10 and 20-year time frames, the average fund has failed to beat the IA UK All Companies sector (although it must be noted that on a 15-year view, emerging markets are well ahead).

Chatfeild-Roberts says this is a major problem with emerging market funds – there can be long periods where they are not making investors decent returns but then other points where performance explodes. However, he says the key is pick the manager with the right qualities – and argues that cynicism is one of the traits to look for.

“You want your manager to be a cynic,” he said.

“It depends on exactly where you are in emerging markets but obviously generally speaking corporate governance is much less good than in developed markets. You have somebody like Angus Tulloch and his team, who are pretty focused on corporate governance and wouldn’t touch areas like Russia with a bargepole. I think that’s pretty important.”


 

As noted, Jupiter’s Merlin funds did go through a bout of underperformance a couple of years ago with some falling into the third and fourth quartiles in 2012, 2013 and 2014. However, all aside from Jupiter Merlin Worldwide Portfolio are outperforming their average peer over 2015 so far and are in positive territory despite more turbulent market conditions.

Furthermore, the funds have a strong long-term track record. The four with a long enough history sit in their respective sectors’ first or second quartile over 10 years.

The largest fund – the £4bn Jupiter Merlin Income Portfolio – is the third highest returning fund in the IA Mixed Investment 20%-60% Shares over the past decade, making a 76.87 per cent gain.

Performance of fund vs sector over 10yrs

 

Source: FE Analytics

The Merlin funds have clean ongoing charges figures ranging from 0.95 per cent to 1.77 per cent.

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