The five crown-rated Stewart Investors Asia Pacific Leaders fund remains the most popular emerging market portfolio with multi-managers, according to the latest study from FE Trustnet, which shows it has held top spot with professional investors in each of the last four years. 
Emerging market equities have been one of the most pain-inflicted asset classes over recent years as China’s slowing growth, falling commodity prices, geo-political tensions, a strong dollar and worries over the potential impact of tighter monetary policy in the US have weighed heavily on sentiment.
Nonetheless, the £7.5bn fund – which is co-run by FE Alpha Managers Angus Tulloch (pictured) and David Gait – remains one of the most popular portfolios from the entire Investment Association universe with fund of funds managers.
Though the number of its backers has fallen significantly since we last conducted this study, 29 funds still count Stewart Investors (formerly First State) Asia Pacific Leaders as a top 10 holding despite the fact the regions it invests in are hugely out of favour.
Looking further down the study and it is clear that fund of funds managers have been reducing their exposure to emerging markets following a difficult 12 months for the asset class, as all but one of the top eight most popular funds with multi-managers have seen the number of vehicles that hold them decrease since February 2015.
Most popular emerging market funds with managers
Source: FE Analytics
Those 29 funds that count Stewart Investors Asia Pacific Leaders as a top 10 holding include the likes of Jupiter Merlin Worldwide, Troy Spectrum, Henderson Multi Manager Active, ISFL Brooks Macdonald Balanced and Margetts Venture Strategy.
Looking at the fund’s longer term track record and it’s easy to see why the fund remains the go-to emerging market fund with multi-managers.
Tulloch is renowned for his conservative approach to the market, which revolves around a focus on quality-growth stocks and prioritising downside protection. As such, it has earned places on the FE Invest Approved List and Square Mile's ‘Academy of Funds’.
According to FE Analytics, Stewart Investors Asia Pacific Leaders has been the second best performing portfolio in the IA Asia Pacific ex Japan sector since its launch in December 2003 with gains of 356.56 per cent, beating its benchmark – the MSCI AC Asia Pacific ex Japan index – by more than 160 percentage points in the process.
Performance of fund versus sector and index since launch
Source: FE Analytics
The fund is also top quartile over one, three, five and 10 years having beaten its benchmark in eight out of the last 10 years.
Given its outperformance has largely come during more testing times for the asset class, it makes sense that Stewart Investors Asia Pacific Leaders is top decile for its risk-adjusted returns (as measured by its Sharpe ratio) and has the lowest maximum drawdown in the peer group since launch.
Though 2015 was a another good year for the fund (it made 1 per cent while the index fell 4 per cent) and it is top quartile so far in 2016, FE data shows that 16 fewer fund of funds count it as a top 10 holding compared to this time last year.
Of course, there are a number of reasons why this may be the case.
It has certainly been an eventful year for the giant fund as First State’s Edinburgh and Hong Kong teams split to protect their investment identities – therefore explaining its change of name to Stewart Investors Asia Pacific Leaders.
On top of that, the group announced that by the summer, some of its leading managers – such as Tulloch – would step back from day-to-day portfolio management.
A recent FE Trustnet poll, however, showed that only 18 per cent of readers were looking to sell the fund given the changes. Therefore, the reason why so few fund of funds hold it as a top 10 holding compared to last year could be better explained by managers taking money out of the asset class in general.
Certainly, China and other emerging markets were the perennial source of bad news for global markets last years as a bubble burst in the Chinese domestic stock market and the country’s authorities devalued the yuan.
Performance of indices in 2015
Source: FE Analytics
Indeed, as mentioned earlier, out of the top eight most held emerging market funds by multi-managers, all but one have seen their popularity drop over the past 12 months.
These include other highly-rated active funds such as Hermes Asia ex Japan, Schroder Asian Income, Charlemagne Magna Emerging Markets Dividend and PFS Somerset Emerging Markets Dividend Growth.
Funds managed by Aberdeen, who were previously seen as the best group for emerging markets and Asian equities alongside First State, have also been caught out by this theme – though funds run by Devna Kaloo and Hugh Young have had a far tougher time of it over recent years than Tulloch and Jonathan Asante’s portfolios.
For example, in February 2014, 27 and 11 funds counted Aberdeen Emerging Markets Equity and Aberdeen Asia Pacific Equity respectively as top 10 holdings. This year, those figures have fallen to one and zero.
The only fund on the list to have seen its popularity increase over the past 12 months is the BlackRock Emerging Markets Equity Tracker, which is now a top 10 holding with 18 fund of funds – up from 16 this time last year.
This series of articles have shown a general increase in the use of passives by multi-managers and these results confirm that the £550m BlackRock offering is now the most popular portfolio with professional investors in the IA Global Emerging Markets sector.
FE data shows the funds that hold it in their top 10 include members of the Architas Birthstar, Barclays Wealth Global Markets and F&C MM Lifestyle ranges.
FE Trustnet has written, on a number of occasions, that the global emerging markets sector has been a very poor hunting ground for active managers.
FE data shows the average active fund in the sector has underperformed the MSCI Emerging Markets index over three, five and 10 years. On top of that, just a third of the peer group’s current members have beaten the index over the past decade – which could explain why trackers have increased in popularity.
Performance of sector versus index over 10yrs
Source: FE Analytics
Indeed, by simply tracking an index, BlackRock Emerging Markets Equity Tracker is outperforming its average peer over one, three and five years.
However, another reason why the fund has seen in an increase in the number of multi-managers that hold it could be for more tactical reasons as passives offer cheaper, faster exposure to some of the most bombed-out areas of emerging markets.
Therefore, as a number of fund of funds managers have told us, trackers could well offer the best returns if sentiment improves towards the largely hated asset class.