Somerset Emerging Markets Dividend Growth is one of the best kept secrets in the investment management industry, says Rathbones’ Mona Shah.

The soft-closure of Aberdeen Emerging Markets – regarded as one of the leading lights in its sector – has highlighted a glaring lack of alternatives for investors looking to put their money to work in fast-growing developing regions.

FE Trustnet research has pointed to a number of possible replacements from the open-ended universe. First State Global Emerging Markets Leaders seems likely to be the biggest beneficiary of increased inflows, but with the fund approaching the £2.5bn mark, IFAs are beginning to question how long it can remain open. 

"We’ve recently added the Somerset Emerging Markets Dividend Growth fund," said Mona Shah, assistant fund manager of Rathbones’ multi-asset portfolios. 

"I’ve been astounded by the performance of Aberdeen and First State but flows are volatile in emerging markets and I think smaller funds have a strategic advantage in that kind of environment." 

FE Analytics data shows that Somerset Emerging Markets Dividend Growth has returned 8.07 per cent since launch, compared with 7.63 per cent from Aberdeen Emerging Markets.

Performance of funds vs sector since launch



Source: FE Analytics

With an annualised volatility score of 13.72 per cent over the last 12 months, the Somerset fund is also more stable than Aberdeen Emerging Markets. 

Edward Lam, who heads up the £52.8m fund, was involved with a dividend strategy at emerging markets specialist Lloyd George Management.

"Global equity income strategies are very fashionable at the moment and Lam is a bit younger than the managers we tend to back but he has been brought up on a risk-averse approach at Lloyd George and his investment process is firmly in place," continued Shah. 

"Lam is very much benchmark-agnostic and runs a concentrated portfolio of only about 40 stocks. It’s very much a team approach and they take a bottom-up view." 

Our data shows the fund has a tracking error of more than 9 per cent compared with the MSCI Emerging Markets index, while Aberdeen Emerging Markets has a score of around 6 per cent. However, Shah says that this figure belies the fund’s emphasis on risk management. 

"The tracking error may imply a fund that is very punchy but the Beta is around 0.7 to 0.8 per cent. The mandate is focused on very stable areas that are less cyclically exposed. It’s focused on dividend growth and these sorts of companies tend to be more predictable." 

At 12.17 per cent, the fund has the lowest max drawdown of any in IMA Global Emerging Markets. The average fund has a max drawdown of 21.71 per cent while Aberdeen Emerging Markets scores 18.01 per cent. 

With a TER of 1.35 per cent, Somerset Emerging Markets is also among the cheapest in the sector and, with a minimum initial investment of £2,000, it is within the reach of retail investors. 

Shah said: "On a long-term view, investors who want access to emerging markets with a bit less volatility would be well suited to dividend-growth strategies."

"The Somerset fund is still very much under the radar but it is only a matter of time before it is recognised by more asset managers and IFAs. It should be very interesting for cautious investors."