Investors should be looking to at least double their money in emerging market equities over a five year period, according to James Donald head of emerging markets at Lazard Asset Management.
Emerging markets have seemingly suffered more so than any other sector over the past three years as they have lurched from one crisis to another.
Starting with the 2013 Taper Tantrum, a recovery in 2014 was short lived and then followed by the nasty China/commodity crash that has only recently showed signs of stabilising. Nevertheless, it is still the worst period for emerging markets since 2008.
According to FE Analytics, the MSCI Emerging Markets index is down 17.27 per cent over three years and 11.8 per cent over five years. For the investors of funds in the IA Global Emerging Markets sector, performance has been little better. Over three years, just five out 71 funds are in positive territory with the average in fund in sector hit harder than the index.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Donald says emerging markets are currently the “most unloved of any sector” and points to huge outflows from emerging market funds in recent years. However, he argues that a five year period or so could see a strong rally that would result in 100 per cent return with little money left to flow further out of the sector.
“There is a significant chance you can double your money over five years in emerging markets. They can certainly claw back what they have lost in the last three years, given the level of pessimism and valuations and the decent fundamentals,” he said.
“Given a bit of stability in exchange rates and economies and less political noise you could see quite an important bounce back in these markets.”
“However, this period has clearly highlighted that this is a volatile asset class. Anyone with less than a five year time horizon probably should not be in this asset class.”
The £631m Lazard Emerging Markets fund has been managed by James Donald - from New York - since 1997.
The fund has clocked up top quartile returns over 10 years and is just ahead of its benchmark over five years but has suffered more than the index over three years.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
Over one year, however, it is bottom quartile after falling much harder than index and its peers.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The fund has a wider geographical spread than many funds, with large positions across Asia, Latin America, emerging Europe and the Middle East and North Africa and Donald says he has recently been buying some of the hardest hit emerging markets including Brazil and Russia.
The Lazard Emerging Markets fund was soft-closed for several years but has since re-opened and was one of the prime beneficiaries of the huge outflows from the likes of Aberdeen and First State last year.
Donald’s process has a value rather than growth bias, the manager says, evident in his bets on firms more exposed to commodities in contrasts to the likes of Aberdeen.
He currently thinks a key driver of an improvement in investor sentiment in the near term will be the subduing of concern over political risk.
“Last year was one dominated by political issues - particularly in Brazil with the Petrobras scandal and in Turkey with Mr Erdogan's comments on interest rates which undermined the currency as well as the two elections that were held. President Zuma's decision to bring in a finance minister that had no experience of finance.”
“There were a lot of political mistakes. I think we are now at a stage that if we get less of these political mistakes, we are set up for a much better period.”
Square Mile Research give Lazard Emerging Markets a rating of ’AA’, noting a strong long-term record for Donald as well as the wider analyst team.
“This is a well-run fund that is managed by a highly experienced team. The process is constructed sensibly and reflects the heightened risks of investing in emerging markets. The process identifies favourably valued growth companies with sustainable business models.”
“The fund should perform relatively well in most market environments but may lag in strong liquidity driven market advances. The team have built an impressive long term track record over the years which has helped validate our confidence in the process.”
“The fundamental research discipline has worked well in uncovering valuation anomalies in the market and helped isolate the managers from the swings in sentiment that can dominate these markets from time to time.”
The fund has a clean ongoing charges figure [OCF] of 1.08 per cent.