In a previous article, FE Trustnet showed that investors would be better off constructing their own global portfolio rather than selecting a ready-made Global fund.
However, FE Trustnet research shows the same is not true for the Global Emerging Markets sector.
Performance
Even though some country-specific funds have delivered astonishing returns over the long-term, investors would have been far better off with a global emerging markets portfolio.
Of the 20 country-specific funds in the IMA universe with a 10-year history, fewer than half of them have outperformed the IMA Global Emerging Markets sector average over the period.
Top-performing region-specific funds over 10-yrs
| Fund | Returns (%) |
|---|---|
| Invesco Perpetual Latin America | 891.33 |
| JPM Latin America Equity | 752.9 |
| Scottish Widows Latin American | 693.95 |
| Threadneedle Latin American | 671.02 |
| Baring Latin America | 570.38 |
| JPM India | 564.54 |
| HSBC GIF Indian Equity | 526.24 |
| Henderson China Opportunities | 440.06 |
| Invesco PRC Equity | 402.07 |
| IMA Global Emerging Markets | 368.71 |
Source: FE Analytics
Even fewer have managed to duplicate the returns of the emerging markets heavy hitters, Aberdeen Emerging Markets and First State Global Emerging Markets, which are up 623.72 per cent and 496.2 per cent respectively over the period.
Volatility
A single-country fund by nature is less diversified and also tends to be more volatile.
Every single one of the nine funds that has outperformed the Global Emerging Markets sector average is less stable, ranging from an annualised volatility of 23.87 per cent for the Henderson China Opportunities fund to as much as 33.45 per cent for the HSBC GIF Indian Equity portfolio.
The Global Emerging Markets sector, by comparison, has an annualised volatility of 20.61 per cent over 10 years, while the MSCI Emerging Markets index scores 21.12 per cent.
Latin American funds have been the dominant front-runners over the last decade, with the four crown-rated Invesco Perpetual Latin America fund returning the most.
Over 10 years, the £484.7m portfolio has made an impressive 891.33 per cent, beating its benchmark, the MSCI Emerging Latin America index, by more than 100 percentage points.
Performance of fund vs index over 10 yrs
Source: FE Analytics
The trade-off for these sky-high returns is an annualised volatility of 25.45 per cent. By comparison, the sought-after Aberdeen and First State portfolios have a score of 19.07 and 16.87 per cent respectively.
The fund, headed up by Dean Newman, requires a minimum investment of £500 and has a total expense ratio (TER) of 1.73 per cent.
Asset allocation
Ben Seager-Scott (pictured), senior research analyst at Bestinvest, says Global Emerging Markets funds tend to be a better option for investors because they look at the developing world from a wider perspective.
"Managers have quite restricted resources going from emerging markets to regions," he said. He adds that there are an extremely limited number of managers with the niche knowledge and expertise required to make a regional-specific or country-specific fund work in the developing world.
"The risk you run there as an investor is you’re just making a very heavy-Beta play and it’s going to be very difficult to choose [an outperforming manager] within that very small pool."
The Henderson China Opportunities fund, for example, is the only China-focused fund to outperform the Global Emerging Markets sector over 10 years.
China has undergone a marked slowdown over the past few years. This puts the Henderson fund at a disadvantage to more general emerging markets portfolios, which have access to Chinese companies, as well as other growth areas of the world.
China Mobile, for example, features in Aberdeen Emerging Markets' top-10 holdings, but the fund is diversified throughout the developing world.
Seager-Scott says investors should not shy away from certain regions or countries, however, if they have a strong conviction about the area.
"Use emerging markets funds but if you have a particular view on a region or country, that’s your classic opportunity to take a passive view and pick up a tracker or an ETF," he said.
"It’s very difficult for most managers to outperform, so this is a classic area where a passive Beta solution would come in and I think that’s a very legitimate way to manage your portfolio."
"Keep your actively managed global emerging markets fund and top up your exposure to countries or regions."
Passive pick
Head of FE Research Rob Gleeson recently tipped the iShares MSCI All Capped Peru Index tracker because he expects big things from the country and says there is no other way of accessing returns to Peru through a single fund available in the UK market.
"You can go with a more general Latin America fund," he said. "But they tend to be very Brazil-heavy and don’t have much exposure to the smaller countries like Peru."
The five crown-rated ETF has made 112.27 per cent since launch in June 2009, successfully tracking the MSCI All Peru Index, which is up 114.79 per cent over the period.
Performance of ETF vs index and sector since launch
Source: FE Analytics
The ETF has also outstripped each of the nine outperforming funds listed in this article over the period, giving investors access to rapidly growing returns at a lower cost – the ETF carries a TER of just 0.59 per cent.
While the ETF is not without a level of volatility, it sits at the lower end of the scale in relation to these region- and country-focused funds, with an annualised score of 20.26 per cent, according to FE Analytics.