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Trusts smash open-ended funds in emerging markets

22 April 2016

FE Trustnet examines how investors have fared in emerging markets funds and investment trusts since the financial crisis began.

By Daniel Lanyon,

Senior Reporter, FE Trustnet

Emerging market investment trusts have considerably outperformed open-ended emerging markets funds since December 2007, according to research by FE Trustnet, as they have more than doubled the return of rival unit trusts and OEICs as well as the gain in the broader index.

However, the average emerging markets open-ended and closed ended portfolio have underperformed the MSCI Emerging Markets index over the past one, three and five year periods. Also, the index has beaten both sector averages in the past five full calendar years – suggesting a tough period for active managers.

As the graph below shows, the average return in the close ended space for EM portfolios – the IT Global Emerging Markets Equities sector – versus the same in the open-ended space – the IA Global Emerging Markets sector – has strongly outperformed since December 2007.

This is the longest comparable period and contains several rallies and sell offs for emerging markets.

According to FE Analytics, the IT Global Emerging Markets Equities sector returned on average 25.92 per cent versus the IA Global Emerging Markets sector average of 9.42 per cent and a gain in the index of 9.38 per cent.

Performance of sectors since December 2007

 

Source: FE Analytics

The closed-ended funds did particularly well in downmarket periods. In 2008 the average emerging markets trust lost 28.93 per cent while the index fell 45.73 per cent and the average open-ended fund lost 36.67 per cent.

On top of that, in the sell-off in 2011 (between January and October of that year) the average open-ended fund in emerging markets fell four percentage points more than the average emerging markets investment trust.


Similarly, exactly the same happened in the next sell off in 2013. However, on both occasions the index lost marginally less as the table below demonstrates.

 

Source: FE Analytics

Between April 2015 and January 2016 there was another sell off. Interestingly, the performance is also relatively the same with the average IT down four percentage point less than the average open-ended fund.

In the open ended space 85 per cent of funds are underperforming the MSCI Emerging Markets index over five years while that figure stands at 66 per cent in the closed-ended space.

Of course, both open and closed-ended funds have different positive and negative characteristics and the two groups of funds are not directly comparable, it could be argued, as the sample size is quite different.

In the IA Global Emerging Markets sector there are 70 open-ended funds with a five year track record and in the IT Global Emerging Markets Equities sector there are just nine.

FE Alpha Manager Terry Smith - who heads up the £5.5bn open-ended (and developed market focused) Fundsmith Equity fund as well as the closed-ended Fundsmith Emerging Equity Trust – argues that emerging market investing is best suited to the investment trust structure.

“We invest in exactly the same sort of things as in our main fund but that which we cannot own because of it being a daily dealing open-ended fund. It is incompatible to put together something like this with the limited liquidity that you find in emerging markets,” Smith said.

“People get very confused about this, they think you can somehow improve the underlying liquidity of instruments if you have an open-ended vehicle. In fact you can only make it worse. That is why we do this through an investment trust.”


Emerging markets have been out of fashion for several years with developed markets substantially outperforming. However, 2016 has been much better start for investors in emerging markets with the index one of the best performers of all the major equity markets.

For example, our data shows the likes of the S&P 500 and FTSE All Share are in positive territory but the MSCI Emerging Markets index has doubled their gain with near 10 per cent rise.

Performance of indices in 2016

 

Source: FE Analytics

Ben Conway, co-manager of the Hawksmoor Vanbrugh and Hawksmoor Distribution funds, says both structures have their benefits as well as negatives.

“If the manager wants to invest in more illiquid stocks - if the mandate allows him to invest in smaller companies in smaller and less liquid EM markets, then a closed-ended structure is undoubtedly better,” he said.

“However, if the aim of the fund is to provide fairly generic, mainly large and mid-cap exposure to mainstream EM markets, then an open-ended structure is probably better.”

“Investment trusts can themselves be illiquid and so long as the liquidity of the underlying portfolio matches the daily dealing liquidity offered by open-ended funds, then these open-ended funds give investors an easy and convenient way to access EM.”

Indeed, the best performer among the investment trusts over one, three and five years is Sam Vecht’s BlackRock Frontiers Investment Trust which tends to buy stocks in less liquid markets. It has also beat all open-ended funds over five and one years and is second best over three years. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.