Many of the larger fund houses are frantically trying to push their products to fill the void, but there is a relatively little known boutique house that is looking to draw in the inflows a different way.
"We’re all about performance, we think that speaks for itself," said Dominic Johnson (pictured), chief executive of Somerset Capital Management.
"We’re not inclined to push for short-term inflows, but stable business over a 25- to 30-year horizon."Somerset runs three portfolios in the Global Emerging Markets sector: Somerset Global Emerging Markets, Somerset Emerging Markets Small Cap and Somerset Emerging Markets Dividend Growth.
Somerset Global Emerging Markets was launched in 2008 and has so far built a decent track record. It is top quartile in its sector over three years, with returns of 12.43 per cent.
The small cap fund has also outperformed, but is already soft-closed to new investors.
There is an onshore and offshore version of the fund, which have combined assets under management (AUM) of around $450m.
Arguably the firm’s flagship fund, however, is the Emerging Markets Dividend Growth portfolio, which is beginning to make a real name for itself in the sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund celebrated its three-year anniversary last month, which means it should now be on the radar of a greater number of advisers and retail investors.
It has already managed to attract £170m of assets, illustrating how highly professional investors already rate it.
Edward Lam and his deputy Edward Robertson have returned 27.3 per cent since inception, beating both the IMA Global Emerging Markets average and MSCI Emerging Markets index by more than 20 percentage points. This puts the fund in the top decile of the sector.
It is a top-quartile performer over one year, with returns of 10.47 per cent.
As well as outperforming, Somerset Emerging Markets Dividend Growth is one of the least volatile in its sector, with an annualised score of just 12.57 per cent over three years.
The average Global Emerging Markets fund has a volatility of 16.12 per cent over the period.
Especially impressive is the fund’s ability to protect against the downside. Our data shows that it has a max drawdown of just 10.67 per cent over three years compared with 15.8 per cent from the sector and 16.97 per cent from its benchmark.
Performance of fund vs sector and index since launch
| Name | Max drawdown (%) | Volatility (%) |
|---|---|---|
| Somerset - Emerging Markets Dividend Growth | -12.63 | 12.57 |
| IMA Global Emerging Markets | -23.36 | 16.12 |
| MSCI Emerging Markets | -23.18 | 16.35 |
Source: FE Analytics
Somerset Emerging Markets Dividend Growth is currently yielding 3.3 per cent, although its management team points out that dividend growth is more important than any headline figure.
"In our view, dividend growth is a major component to long-term equity returns, hence the name of the fund," added Crawley.
Dividend-focused emerging market vehicles are a very new concept, with the vast majority of launches occurring in the last year.
This includes Jason Pidcock’s Newton Emerging Income portfolio, which has already attracted inflows of £213m since its launch in October 2012.
However, no emerging markets income fund has a track record as long as Somerset, which the team is very proud of.
"It was the first fund of its kind – we’re essentially the pioneers of emerging markets income in the UCITs form," added Oliver Crawley, partner at Somerset Capital Management.
Crawley also points out that unlike many of its peers, Somerset only invests in equities. Many emerging market income funds choose to prop up their yield with fixed interest instruments, but the team thinks this goes against the principle of holding a fund of this kind.
Lam and Robertson target stocks that have a yield above the average of the emerging markets index, which is currently at around 2.2 per cent.
As mentioned earlier, this is only part of the story: Johnson says the team prioritises those that can grow their distribution stream and benefit from emerging market growth themes.
Around 85 per cent of the fund is invested in companies with a market cap of below $20bn.
"This means our clients get very different exposure from other emerging markets funds, which tend to focus on the mega caps such as CVRD, Petrobras and Samsung," Johnson added.
He says the managers’ favourite sector is currently financials, particularly insurance companies such as PZU in Poland, AFP Habitat in Chile and Anadolu Hayat in Turkey.
The fund is regionally diverse, with around 40 per cent in Asia, 20 per cent in South America, and the rest in emerging Europe and the Middle East. Though Somerset is still a boutique firm, the team visits companies on their own soil very regularly. On average, they visit 500 companies a year.
Johnson says Somerset will look to close the fund to inflows once it reaches £2.5bn – something that the chief executive is very passionate about.
"Since we are a partner-owned business, we are able to limit the capacity of our products to ensure continued access across the market capitalisation spectrum," he said.
"We have set a target of £2.5bn, which we will to stick to, as we did with the small cap fund. We actually closed the small cap fund before it got to its target."
"Controlling inflows is especially important in emerging markets because of the issue of liquidity. Importantly, we manage the fund as if we were at our capacity limits and do not drift up the market capitalisation scale as assets grow."
Once soft-closed, no investor will be able to add to existing positions, so as to protect the interests of existing investors.
Another big advantage of the Somerset fund is its cost structure, which is cheap compared with its rivals in IMA Global Emerging Markets.
"We think a low level of fees is the best way to run a stable business and retain clients," said Johnson.
"The OCF [ongoing charges fee] is currently 1.36 per cent, although this figure is expected to fall owing to an increase in the fund’s AUM."
"The AMC [annual management charge] is 1 per cent and there is currently no initial charge or performance fee."
Crawley added: "We believe these charges represent exceptional value to retail investors. In our view charges have been too high for too long across the investment management industry – I want to offer our clients a quality product at a fair price."
By point of reference, Newton Emerging Income has an OCF of 1.75 per cent, and an AMC of 1.5 per cent.
Johnson says the fund has sold very well in recent months, particularly in the UK, Canada, New Zealand and the US.
It is also a big component of a number of funds of funds, particularly those managed by Aberdeen, T Bailey and Rathbones.