The likes of Carmignac Portfolio Emerging Discovery, Hermes Global Emerging Markets and Fidelity Emerging Markets are among the only global emerging markets funds to have made money over the past three years, according to research by FE Trustnet.
There are 71 funds in the IA Global Emerging Markets sector with a three year track record but only six – less than 10 per cent - are in positive territory over this period in what has been a dire time for investors in the region.
According to FE Analytics, the average fund in the sector is down 17.93 per cent while the MSCI index is down 19.44 per cent. By comparison the FTSE World index has rallied nearly 30 per cent over the same period.
Performance of sector and index over 3yrs
Source: FE Analytics
Of the six that are in positive territory, two are specifically small cap focused: Templeton Emerging Markets Smaller Companies – which is the top performer – and JPM Emerging Markets Small Cap.
Source: FE Analytics
Of course as they mainly invest down the cap scale, this means they can behave differently to the MSCI Emerging Market index which is mostly composed of larger companies as well as most funds in the IA Global Emerging Markets sector which tend to opt for larger cap stocks.
Mark Mobius (pictured), the lead manager of Templeton Emerging Markets Smaller Companies, says the advantage of small caps is that many companies are driven by ‘local market dynamics’ and are therefore less tied on global market trends.
They also tend to be family owned and as the small-cap emerging-market universe huge they tend to under researched.
Templeton Emerging Markets Smaller Companies has a clean ongoing charges figure [OCF] of 1.6 per cent while the JPM fund’s OCF is 1.5 per cent.
The €207m, five crown-rated Carmignac Portfolio Emerging Discovery fund, managed by Xavier Hovassen and David Young Park is second best. It has returned 8.34 per cent over three years.
The fund, which takes a non-benchmarked approach has clocked up a low correlation to the MSCI Global Emerging Markets index as a consequence over three years of 0.76, as well having similarly low correlation to many of the funds in the sector.
The majority of the portfolio has been invested in mid-caps, followed by smaller companies and some larger caps and has a broad geographical spread including significant exposure to Latin America as well as smaller positions in Africa and the Middle East.
Currently its largest holdings include UK-listed marketing firm Innocean Worldwide, Chinese online media company Sina Corp and the Jordanian logistics firm Aramex.
The fund has a clean OCF of 1.3 per cent.
The £1bn Fidelity Emerging Markets fund, managed by FE Alpha Manager Nick Price, and the £440m Hermes Global Emerging Markets fund, managed by Gary Greenberg, are next best performers. Our data shows they have returned 4.6 and 3.08 per cent respectively over three years.
Both, however, are biased towards the large-cap end of the market.
Performance of sector and index over 3yrs
Source: FE Analytics
Greenberg, who is head of emerging market equities at Hermes, wisely sold over his big overweight – China – before the worst of the selling last summer, instead opting for greater exposure to India. He was previously very bullish on China.
The fund is also one of the least volatile of the funds in the sector and as the second highest level of alpha generation over three years.
For emerging markets to outperform developed markets as they have done in the past, profitability must first recover, Greenberg says.
“This means profit margins need to rise, and for that to happen, wage hikes must continue to slow versus productivity improvements. This process is already underway but needs to become more evident,” he said.
“Second, the cycle must turn, as supply comes out not only of commodities but also basic goods like steel, aluminium, shipbuilding and other sectors. This process is just starting, and is unlikely to show meaningful results until next year,” he added.
Charles Stanley Direct’s Rob Morgan is a fan of Fidelity Emerging Markets, believing Price well placed to outperform over the longer term due to being very highly resourced in each emerging market region at Fidelity.
The fund also carries an ‘A’ rating from Square Mile, the investment research house.
“The manager regards stock selection as the primary source of relative performance, and since he took charge in July 2009, the fund's performance has generally been driven by the team's stock selection,” Square Mile said.
“Mr Price aims to take risks, primarily at the stock level, in a measured manner and while the mandate empowers him with plenty of flexibility, we think he has a strong innate sense of risk. We see this fund as a solid choice for investors seeking a broad exposure to emerging market equities.”
Hermes Global Emerging Markets has a clean OCF of 1.18 per cent while Fidelity Emerging Markets is cheaper at 1.07 per cent.
Last up Rob Marshall-Lee’s £42m fund – Newton Global Emerging Markets - is also in positve territory, being up 1.57 per cent.
The manager has only run the fund since September 2013, so the three track record is not as relevant in this case but as most Newton funds have a thematic-based approach drawing on top down macroeconomic ideas there is more overlap than in other examples of a manager replacement.
Marshall-Lee has had overweights in India relative to the benchmark since taking over the fund which although initially painful, has been a big driver of the fund’s outperformance.
The fund has been more volatile than the other six mentioned in the article and has a higher maximum drawdown.
Newton Global Emerging Markets has a clean OCF of 0.95 per cent.