Investors are the most turned off putting their cash to work in emerging markets funds this year than in any other sector, at least among FE Trustnet readers, according to a recent poll.
It is early days but a tricky start to the year means the average fund in the IA Global Emerging Markets sector is already down more than 2 per cent following on from double-digit losses in 2015.
Performance of sector and index since Jan 2015
Source: FE Analytics
But among the professionals, opinion on the asset class remains divided with some staying well clear while others think 2016 could see a bounce back – such as Patrick Cadell, manager of the Liontrust GF Global Strategic Equity fund.
“Our positive tactical view on EM equities is based on attractive valuations, depressed sentiment towards the asset class and improving economic momentum, which in turn is driven by stabilisation in Chinese growth,” he said.
“Low valuations and lack of investor appetite towards EM in recent years is not a new story. However, the fact that the EM Economic Surprise Index turned positive in November, and that this trend continued in December without EM stock prices following suit, signals major dislocation.”
However, for those looking to increase exposure in true contrarian style, in this article we take a look at two well-regarded emerging market portfolios: Fidelity Emerging Markets and PFS Somerset Emerging Markets Dividend Growth.
Both are headed by an FE Alpha Manager, the former Nick Price and the latter Ed Lam . The managers have headed their funds since 2010, both portfolios are around £1bn in size and both have finished in the top decile of the IA Global Emerging Markets sector over the past five years.
According to FE Analytics, Lam’s has been the sector’s best performer over five years with returns of 5.99 per cent; this puts him ahead of the all the other 55 other portfolios with a five-year track record in the sector. Its MSCI Emerging Markets benchmark has returned 20.82 per cent over that time.
Performance of funds, sector and index over 5yrs
Source: FE Analytics
Charles Stanley Direct’s Rob Morgan thinks Price is better placed to outperform over the longer term despite the relative outperformance of Lam over five years, pointing to the size of the team behind the manager.
“The major difference to my mind is that the former is very highly resourced with broad coverage in each region while the latter is a more boutique approach,” he added.
“My preference for EM is the former as I think it’s very difficult to cover EM without considerable resources.”
Another difference is geographical positioning. Lam has 14.3 per cent in UK listed companies focused on emerging markets as well as a further 18.93 per cent in Europe ex UK stocks such as in Polish insurance firm Powszechny Zakład Ubezpieczeń, a top 10 position.
This is very different to the Fidelity offering, as the below table illustrates.
Source: FE Analytics
Sector positioning is another feature that separates the two funds with Lam holding his biggest overweight to financials while Price is opting for almost half of his portfolio to be in consumer products.
While Morgan favours the Fidelity fund, Somerset Emerging Markets Dividend Growth fund is one of the FE Research team’s favourites in the IA Global Emerging Markets sector – although Price’s portfolio is also on the FE Invest Approved list.
The team says Somerset’s process has proved its value in several different market environments and the group honed its approach to downside risk after being ‘caught out’ by earnings downgrades in 2007.
“This proves it has learnt from its mistakes, resulting in a stronger selection method that has worked so far on this portfolio,” the team said.
Another differentiator is that Price has more holdings: 81 versus Lam’s 49. Lam has largely avoided Chinese equities of late – whereas Price is more neutral on the country – and is also often holding substantial amounts of cash due to a cautious outlook.
Meera Hearnden, investment manager at Parmenion, uses both funds for exposure to emerging markets for the purposes of diversification and thinks the two portfolios “dovetail well together”.
“The Fidelity fund focuses on ‘quality growth’ companies such as businesses with niche products, barriers to entry, pricing power and those generally within a competitive landscape.”
“Importantly, a stock must be held in one of Fidelity’s three regional emerging market portfolios for it to be included in this fund.”
“This means the stocks have been closely scrutinised by the large team of analysts before being included in this fund. The fund can also invest in off-benchmark stocks which can offer attractive diversification benefits relative to other funds in the peer group.”
She adds the Somerset fund also has a focus on quality companies, but with greater emphasis on valuation.
“The manager assesses value on the basis of market volatility and negative investor sentiment,” she said.
“A different approach to Fidelity’s, but a strategy that has been very successful, and although not a primary target, it offers an attractive yield for what is an emerging market fund.”
Somerset Emerging Markets Dividend Growth has the more expensive ongoing charges figure (OCF) of 1.33 per cent compared with 1.07 per cent for Fidelity Emerging Markets.