When investors think of global emerging market funds, those run by the likes of Aberdeen and First State (or Stewart Investors) are those that usually come to mind.
However, there are a number of up-and-coming portfolios in the IA Global Emerging Markets sector that have turned in strong medium-term numbers yet seem to have gone largely unnoticed by investors.
One example is the five crown-rated Hermes Global Emerging Markets fund which was launched in the turbulent conditions of December 2008, but this has by no means affected its long-term performance.
In fact, while many emerging markets are enduring a torrid time of volatility and underperformance, this fund has gone from strength to strength, finding itself in the top decile over one, three and five years and providing a positive 1.33 per cent return over Gary Greenberg’s tenure (which began in July 2011), compared to his peer average’s loss of 21.16 per cent.
Performance of fund vs sector under Greenberg
Source: FE Analytics
Not only has it delivered strong returns, it has also achieved a top-decile annualised volatility, Sharpe ratio (which measures risk-adjusted returns) and maximum drawdown (which measures the most money an investor would have lost if they’d bought and sold at the worst possible times) over five years – which has been a very challenging time to be in emerging market equities. 
The £422m fund’s manager (pictured) adopts a predominantly bottom-up stock-picking process, although he complements this with a top-down macroeconomic view.
“I know some people do this, but I’m not sure how many people in long-only emerging markets integrate bottom-up and top-down,” Greenberg said. “I think a lot of people are bottom-up and I don’t understand how you can just be bottom-up in the world we live in – I just don’t get it.”
“It strikes me as being an incomplete process. Since we took over the fund four and-a-half years ago we have added alpha. Most of this is bottom-up, but a good third of the alpha has been from top-down. It’s not impossible to do, and it seems to me that [the issue of bottom-up-only investing in emerging markets] is an elephant in the room.”
The manager holds a concentrated portfolio which currently consists of 55 holdings. Out of all of the investable stocks in emerging markets, Greenberg and his team select the companies that have the most liquidity, and holdings are then chosen from these through a screening process which includes growth prospects, quality of product, market share, management skills and environmental, social and corporate governance (ESG).
“A company’s governance and environmental stewardship are aspects that will probably affect the share price, so it’s not the case of simply being subject to great moral precedence, it’s more like looking ahead at what could happen,” Greenberg explained. “If a company spills a lot of oil in the Gulf of Mexico for instance, it’s a problem.”
While his investment process seems to work well and has led to the fund delivering the third-highest return in its sector over three years, it is relatively under-the-radar and often overshadowed by its larger peer, Hermes Asia ex Japan Equity which is now soft-closed.
FE data shows, for example, that only one fund of funds in the Investment Association universe counts Hermes Global Emerging Markets as a top 10 holding.
Performance of fund versus sector and index since launch
Source: FE Analytics
Why is this the case and have investors been missing a trick? Ryan Hughes, fund manager at Apollo Multi Asset Management, owns Hermes Asia ex Japan Equity, but says that it was a close call between holding this and holding Greenberg’s fund.
“There’s a bit of overlap between the two funds – the last time we spoke to both managers there was about a 30 per cent stock commonality between the two, although that was about a year ago,” he said.
“We looked at Gary’s fund as well but chose Jonathan Pines’ fund on the basis that we wanted more emerging Asia exposure at the time, and we thought there wasn’t a case to double up with Hermes. The emerging market team at Hermes is very strong, though”
Hughes believes that the reason Greenberg’s fund has received less publicity is because global emerging markets (GEM) funds have been tarred by China and other well-publicised macroeconomic issues in Russia, Brazil and other oil exporting countries.
The multi-manager sold out of emerging markets altogether two years ago after removing his only GEM fund – Standard Life Investments Global Emerging Market Unconstrained – from his portfolios following the departure of manager Ross Teverson.
“If I wanted a more broad-based exposure to emerging markets, I would buy Greenberg’s fund,” Hughes added.
While Hughes has no exposure to the market area, AXA Wealth’s Adrian Lowcock says emerging markets look more attractive from a valuation perspective and believes that good consistent performance will be recognised and therefore provide rewards for the investor.
However, he warns that managers who want to be successful in emerging markets will need to be in it for the long term.
“Greenberg’s good bottom-up stock-picking of companies in emerging markets has driven his fund’s performance, with a focus on companies which are embracing the new world and not fighting it,” he said. “The fund is concentrated, has a high active share and has reasonably long holding periods.”
Martin Bamford, managing director and chartered financial planner at Informed Choice, says the fund’s strong record of outperformance is largely due to Greenberg’s insights from the world of hedge fund management, as well as his global perspective of equity investing.
He adds that, at £420m AUM, investors should have no concerns about capacity constraints either, and that the manager follows a blend of value and growth investing which gives him the flexibility to follow an appropriate style as market conditions dictate.
“For investors who want to move out of an underperforming emerging market fund or gain exposure to this sector for the first time, this fund would be worth considering,” Bamford said.
Performance of indices over 5yrs
Source: FE Analytics
“It’s been a turbulent few months for global emerging markets so investors need a manager with the ability to steer through these challenging conditions. Our preferred fund in the sector is Invesco Perpetual Global Emerging Markets, which scores very highly in our quantitative research for risk-adjusted returns, consistently and cost.”
“We would however be very happy to recommend the Hermes fund as an alternative or where additional diversification in the sector was needed for larger portfolios.”
Whitechurch Securities’ Ben Willis, though, warns that investors should be cautious on emerging markets in general, despite the fact they are trading on cheap valuations.
In price-to-book terms, he says they are at pre-financial crisis levels but in price/earnings terms, they do not look as cheap and earnings declines in the region need to be checked.
“These markets may see and need lower valuations, further currency depreciation, a bottoming of commodity prices, China economic and currency stability before corporate margins start improving,” Willis said.
“However, now could provide a good entry point for the long-term investor and the Hermes fund is a good choice if you are looking for actively managed exposure to these markets.”
Hermes Global Emerging Markets has a clean ongoing charges figure of 1.13 per cent.
