Investors have returned to emerging market equities this year after rebounding commodity prices, more robust economic numbers and relatively attractive valuations lifted sentiment to the out-of-favour area. 
According to FE Analytics, the MSCI Emerging Markets index has posted a gain of more than 40 per cent over 2016 to date, strongly outpacing the 25.47 per cent rise in the developed market-focused MSCI World index.
Funds with a focus to the asset class have also had a strong year, with the average member of the IA Global Emerging Markets sector posting a 37.94 total return.
However, even this year’s gains have not been enough to reverse the underperformance of recent times. As the chart below shows, the emerging markets index and funds have generated only half the returns of the MSCI World over three years, despite 2016’s strong run.
Performance of sector and indices over 3yrs
Source: FE Analytics
Darius McDermott (pictured), managing director of FundCalibre, thinks that a rotation away from developed markets – many areas of which are trading at near-record highs – and towards emerging markets could be on the cards.
“2016 has also seen a significant rebound in emerging markets. After a number of years of disappointing performance, an improving political landscape in a few key countries, as well as reduced budget deficits, have helped bring about what may be a bottoming-out of economies and markets,” he said.
“Even an increase in US interest rates is now seen as less of a worry as sentiment towards emerging market equities has become more positive.”
McDermott highlights three funds that could be attractive for investors looking to take exposure to emerging markets and in this article we take a closer look at them.
Charlemagne Magna Emerging Markets Dividend
This €341.6m fund has been managed by Julian Mayo since launch in June 2010, with Mark Bickford-Smith joining as co-manager in January 2012. Charlemagne Capital is an independent asset management house that specialises in emerging markets.
The fund seeks to achieve a combination of income and long-term capital growth through a portfolio of emerging market equities, with top holdings including Astro, China Construction Bank and Taiwan Semiconductor Manufacturing Company.
Performance of fund vs sector and index since launch
Source: FE Analytics
As the above chart shows, Charlemagne Magna Emerging Markets Dividend has outperformed both its average IA Global Emerging Markets peer and the MSCI Emerging Markets index since launch with a first-quartile 51.55 per cent total return.
The managers use a bottom-up process on the fund, looking for companies able to pay high dividends in the short term but are also able to grow them over the long term, often finding them in niche areas of the market.
“A hidden gem among other better known emerging markets funds,” McDermott said. “This fund benefits from a strong team an intuitive investment approach and the backing of a company focused on emerging markets.”
Charlemagne Magna Emerging Markets Dividend has an ongoing charges figure (OCF) of 1.40 per cent and is yielding 2.95 per cent.
James Donald has run this £885.9m fund since launch. It has a strong long-term track record, making a 579.40 per cent total return over the past 15 years and outperformed its average peer and the index by a wide margin; it’s also performed well this year, making the sector’s fourth highest return (out of 82 funds).
Performance of fund vs sector and index over 15yrs
Source: FE Analytics
This is another fund taking a stock-specific approach to emerging markets, as Donald and his team look for companies showing strong financial productivity while still trading at attractive valuation levels. Lazard has an in-house research team of over 230 investment professionals spread across the globe, which aid in the search for opportunities.
McDermott said: “A well-resourced emerging market team based in New York, they employ a strong value discipline which has led to this being one of the standout funds in its sector.”
The fund is currently overweight emerging Europe, Latin America and Africa and has an underweight to Asia. That said, Asia is its largest regional allocation with names such as Taiwan Semiconductor Manufacturing Company, Tata Consultancy Services and Baidu featuring in its top 10.
Lazard Emerging Markets has a clean OCF of 1.08 per cent and is yielding 2.10 per cent.
Matthew Vaight also takes a bottom-up approach on his £1.6bn fund, attempting to find companies that are run for the benefit of the shareholder but this fact has been missed by other investors. He then holds these undervalued stocks for the long term.
“A strongly-performing emerging markets fund, Matthew’s stock-picking style, and desire to find companies other managers have not, separates this fund from the pack,” McDermott said. “Investors optimistic about emerging markets’ long-term prospects and comfortable taking some risk may find this fund suitable.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Since its launch in February 2009, the fund has made a top-quartile 175.87 per cent total return and beaten the MSCI Emerging Markets index by more than 30 percentage points. It has been slightly more volatile than its average peer and the index and is in the bottom quartile for maximum drawdown but is one of the best in the sector from a risk-adjusted returns point of view.
The fund’s largest position is Samsung Electronics, followed by Taiwan Semiconductor Manufacturing Company, Baidu, Ambev and Shinhan Financial.
M&G Global Emerging Markets has a 1.03 per cent clean OCF and is yielding 1.25 per cent.