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The funds leading the emerging markets charge since ‘Black Monday’

05 November 2015

Following a very painful summer, emerging markets have been tearing ahead. In this article, FE Trustnet looks at the biggest winners and losers from this recent snap rally.

By Alex Paget,

News editor, FE Trustnet

Emerging market equities have rallied back hard following a very painful summer with the average fund in the IA Global Emerging Markets and IA Asia Pacific ex Japan sectors up a hefty 10.75 per cent and 12.17 per cent respectively since the substantial sell-off of August’s ‘Black Monday , according to FE Analytics.

This has been quite a reversal in fortunes, though, given the amount of selling that occurred during the summer months, many were expecting some form of relief rally in the developing world.

Performance of sectors since 24 August (Black Monday)

 

Source: FE Analytics

After all, the asset class has been plagued with headwinds for a number of years now and these have only intensified in 2015 as commodity prices have once again fallen while uncertainty remains rife regarding the future of the Chinese economy given its slowing growth.

Of course, there are many who believe this recent rally is nothing more than a dead-cat bounce – especially given the increasing likelihood of an interest rate rise in the US and how such an event would affect many emerging market economies that are highly exposed to dollar denominated debt.

Such arguments will no doubt continue to rage on for the foreseeable future, but in this article we look at the funds in the IA Global Emerging Markets and IA Asia Pacific ex Japan sectors that have made the most of the improved sentiment.

Of course, any such article should be caveated with the fact that less than three months is a very short time frame. On top of that, while many funds have made strong gains since ‘Black Monday’, very few have been able to offset the huge falls they saw during the summer.

In fact, less than 10 per cent of the 173 funds in the two peer groups are sitting on a positive return so far in 2015.

 

Source: FE Analytics

Nevertheless, the two peer groups occupy second and third spot in Investment Association’s sector rankings over the period in question and, as the table above shows, a few of their members are up more than 20 per cent.


 

The fund sitting at the top of the table is Tiburon Taipan, which sits in the IA Asia Pac ex Japan sector and has made an impressive 23.45 per cent.

The nimble $22m fund is headed up Mark Fleming and is fairly concentrated portfolio of 41 holdings.

Having been one of the sector’s best performers immediately after the financial crisis, Tiburon Taipan has struggled over the past five years or so as sentiment has waned towards the developing world. In fact, it is down some 18 per cent since June 2011 while its MSCI AC Asia Pacific ex Japan benchmark has made a slight positive gain.

One of the reasons for that underperformance may have been its relatively high weighting to energy and mining stocks (which make up 15 per cent of the portfolio) and its 25 per cent weighting to Australia – a country which is again heavily biased towards commodities.

In his most recent note to investors, though, Fleming said he felt the commodity market was bottoming out. Indeed, it has been those mining and energy names that have led the recent rally.

“We feel that the sell-off, especially coming as it does after a capital raising, is the sort of cathartic event normally associated with a market bottom,” Fleming said.

“This cognitive dissonance displayed by investors is setting the sector up for a big bounce, which will be a problem for the very considerable short positions in miners and oil companies. After four years of massive underperformance, we can’t think of an industry with lower expectations embedded in prices.”

Second on the list is Andrew Swan’s $1.5bn BlackRock GF Asian Dragon fund.

Swan has an enviable track record as since he took charge of the fund in August 2011, it sits in the IA Asia Pacific ex Japan sector’s top decile with gains of 41.1 per cent – putting it some 20 percentage points in front of its benchmark.

Performance of fund versus sector and index under Swan

 

Source: FE Analytics

However, as the graph shows, investors in the fund had a very tough time of it at points during this year (it fell more than 30 per cent between April and late-August).

These losses (and its subsequent rally) are due, in part, to the manager’s value style. Its significant outperformance since ‘Black Monday’, for example, is understandable given its overweight position in basic materials and mainland China.


 

It is a similar story with Jonathan Pines’ now closed Hermes Asia ex Japan fund, which had been comfortably the best performer in the sector up between its launch until this year due to the manager’s value bias.

The fund is up 18.77 per cent since ‘Black Monday’, but has incurred losses of 30 per cent in the six months prior to that. Nevertheless, it is one of the few portfolios on the list which is in positive territory for the year with gains of 4.89 per cent so far in 2015.

The other Asia Pacific ex Japan funds to feature on the list of top 10 performers include GAM Star Asian Equity, GS Asia Portfolio, Marlborough Far East Growth and JOHCM Asia ex Japan Small and Mid Cap.

Given China was the principle driver of the sell-off but has led the subsequent rally, it is not surprising that Asia Pacific ex Japan funds dominate the list. Nevertheless, Baillie Gifford Emerging Markets Growth, NFU Mutual Global Emerging Markets and MFS Meridian Emerging Markets Equity also feature.

Richard Sneller’s £435m Baillie Gifford fund is up 18.36 per cent over the period in question, building on its top decile performance (which has left it 40 percentage points ahead of its benchmark) since he took charge in March 2005.

Performance of fund versus sector and index under Sneller

 

Source: FE Analytics

The fund, which like all Baillie Gifford offerings is focused on bottom-up stock picking, has a 32 per cent weighting to China, which goes some way to explaining its strong gains since the correction.

There is no doubt that the recent rally in emerging markets has been met with a certain degree of cynicism. Not only has the index rallied hard, for example, thanks to strong gains from some of the asset classes’ most troubled areas (the likes of banks, mining, energy and China), but it this tide has lifted most boats.

This is highlighted by FE data, as it shows that every fund in the two sectors has made at least 5 per cent since ‘Black Monday’.


 

The likes of Man GLG’s Edward Cole recently told FE Trustnet that the recent rally was nothing more than technical, pointing out that investors should continue to strive for higher quality companies with a decent level of downside protection for their emerging markets exposure.

“Things got very extreme in terms of capitulatory price action and it was one way traffic for three months. We have an indicator that shows this, the market capitulates on emerging markets,” Cole said.

Interestingly, when you look at the list of the 10 worst performing funds in the two sectors (and those emerging markets funds which have recently moved to the IA Specialist sector), it is littered with some of the most popular funds in the space which have outperformed over the long term by focusing on high quality companies with reliable earnings.

 

Source: FE Analytics

The worst performer, for example, has been FE Alpha Manager David Gait's Stewart Investors (formerly First State) Global Emerging Markets Sustainability fund. It carries five FE Crowns and has beaten its benchmark in every calendar year since 2009.

Also joining it at the foot of the table are PFS Somerset Emerging Markets Dividend Growth, Aberdeen Global Asian Smaller Companies and JPM Emerging Markets Income.

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