The JPM Emerging Markets Small Cap and Templeton Emerging Markets Smaller Companies funds have consistently outperformed other portfolios better during recovery rallies in emerging markets, according to research by FE Trustnet.
Emerging markets have been the worst sector to invest in 2015 as China’s rallying stock market fell off a cliff and global markets panicked that the world’s second largest economy was indeed heading for a ‘hard landing’ from its heady days of high economic growth.
Performance of sector and index in 2015
Source: FE Analytics
Many think there is still more to pain to come for the asset class, though. Nick Mustoe, chief investment officer at Invesco Perpetual, is one such market commentator as he says the outlook is unclear at best.
“While growth in developed economies is reasonable, it’s disappointing by historical standards. However, the outlook for emerging markets, and for Latin America in particular, remains most challenging. Commodity weakness continues to weigh on the region.”
“In the absence of any strong impetus, investors remain skittish. This is reflected in defensive sectors performing strongly given that they are typically seen as ‘safe havens’, notwithstanding share price valuations which have been pretty extended in some areas.”
However, opinion is still very much divided as to whether 2016 will see emerging markets snap back following their losses this year or see further falls.
Several fund managers such as think there is reason to start to buy back in due to low valuations and over-selling by jittery investors.
For example, Liontrust’s Patrick Cadell – manager of the Liontrust GF Global Strategic Equity fund –has ramped up exposure from 43 per cent to 69 per cent recently in anticipation of rally.
“The likely removal of the Fed overhang on 16 December could represent a turning point for emerging markets. Our rationale for raising net exposure to 69 per cent from its low of 10 per cent in mid-August remains intact: investor positioning is extremely negative, Chinese growth is stabilising and the companies in our long book continue to deliver strong earnings growth at very attractive valuations,” Cadell said.
Of course, the past is no guide to the future, but in this article we take a look at portfolios within the IA Global Emerging Markets sector that have outperformed in strongly recovering markets.
Emerging markets have faced a number of tough periods over since the global financial crisis. However, there have been three periods that constitute a strong rally over this period.
The first between October 2008 and January 2011, the second from September 2011 to March 2013 and the last from January 2014 to April 2015. Of course there has been some recovery since Black Monday on 25 August when markets reached a capitulation point with the index up 9.45 per cent.
In the first of these rallies, which was preceded by the worst fall for the index over this period of 50 per cent, it gained almost 150 per cent.
The second saw the index rise 30 per cent only to be met by weak sentiment and later met by the ‘taper tantrum’. The third saw the index rise 27.32 per cent until the bearishness kicked in and the index fall by 30 per cent.
Performance of index over 8 years
Source: FE Analytics
In these three periods the $372m JPM Emerging Markets Small Cap $453m Templeton Emerging Markets Smaller Companies fund have been in the top quartile or decile for returns, and significantly outperforming the MSCI Emerging Markets index.
Performance of funds, sector and index over 8yrs
Source: FE Analytics
Of course, both funds specialise in smaller companies which often have a higher beta to the broader market which means they tend to rise and fall more relative to many of their peers.
However, this is not always the case. The $1.2bn Aberdeen Global Emerging Markets Smaller Companies fund managed very strong returns in two of these rallies but it returned less than the index in the most recent.
JPM Emerging Markets Small Cap has been managed by Amit Mehta since November 2007. It returned 40.63 per cent over the period, beating both the sector and index, giving it the third best performance in the sector
Performance of fund vs sector and index under Mehta
Source: FE Analytics
The fund is has been overweight India during the most recent rally, which helped performance as helped its outperformance as the country’s stocks surged since Narendra Modi was elected as Prime Minister earlier in March 2011.
Templeton Emerging Markets Smaller Companies was launched not long before, in October of 2007. It has performed similarly strongly posting the fourth best return in the sector
Performance of fund vs sector and index since launch
Source: FE Analytics
It is managed by Mark Mobius, with Tom Wu and Dennis Lim deputy managers.
PFS Somerset Global Emerging Markets which is more large cap focused has been in the top quartile of the sector in the past two rallies but was only launched in November 2008 and so is not fully comparable with the other funds.
However, manager Edward Robertson is more defensively positioned at present, expecting further challenges. As a result he is focusing most on strong financial and consumer companies “able to weather this environment”, as well as some companies that have exposure to overseas earnings.