Emerging market equities have lagged behind their developed market rivals in recent years due to various headwinds such as a slowdown in economic growth in China.
Performance of indices over 3yrs
Source: FE Analytics
However, a number of industry experts say sentiment is likely to turn more positive towards emerging markets in the near future because the long-term growth story is still intact and investors can now gain exposure to the sector at very cheap prices.
Willis (pictured), who is head of research at Whitechurch, is one such emerging market bull.
However, he says he and his team are thinking about changing their current “broad base” emerging market exposure to a more focused approach in order to capture more of the upside. “We still like emerging markets,” Willis said. “However, we are thinking about adapting to a BRIC approach instead of a more broad-based one.”
“At the moment, we are fairly neutral on emerging markets but while we used to have broader exposure, now is maybe the time to be more focused.”
“We haven’t had the conviction to do it yet, but we are looking at either BRIC or country-specific funds,” he added.
Willis is contemplating shifting his fund allocation because not only are Brazil, China and India some of the largest emerging market economies, but they have also turned out to be the most out of favour, with other markets such as the ASEAN region performing much better.
“There has been a lot of bad news surrounding emerging markets and the likes of Brazil, India and China have taken the brunt of it,” he said.
“These are the biggest of the markets and, in our opinion, the ones which are likely to drive a recovery – particularly China and Brazil which have had an absolute nightmare recently.”
Performance of indices over 1yr
Source: FE Analytics
“Sometimes there are markets that are justifiably cheap and we would avoid them, but we think a good opportunity is opening up and if sentiment does turn more positive, then we could benefit,” he added.
The IMA Global Emerging Markets sector has been dominated by funds from Aberdeen and First State for the last 10 years.
However, last year both groups took the decision to soft-close their emerging markets portfolios in order to protect the interests of current investors.
Willis says that though it is frustrating that the sector’s top performers are out of reach, it isn’t the main reason he may switch his exposure.
“Aberdeen was our core holding before it soft-closed and we couldn’t go into First State because they were also close to capacity, so that was a no-no. We needed an alternative, but that hasn’t really driven us down this path.”
“We have been quite happy with our current exposure. We have Templeton Emerging Markets IT, which is managed by the highly experienced Dr Mark Mobius. However, as it is an investment trust and because of the way he runs money, it can only be used for our higher risk clients.”
“I think we also had a good counterpart to it in the JPM Emerging Markets Income fund, which has performed the way you hope an income fund that invests in emerging markets would,” he added.
Both the Templeton Emerging Markets trust and Richard Titherington’s JPM Emerging Markets Income fund were hit hard by the sell-off last May on the back of Ben Bernanke’s tapering speech. As a result, both have underperformed against the MSCI Emerging Markets index over the last year.
If investors are looking to take a more focused approach to emerging markets via BRIC funds, Willis says that they should be aware it is a more risky strategy.
For example, while he is optimistic in his outlook for China and Brazil, he says Russian equities are always a difficult one to call.
“We like China and we think there is still plenty of good news still to come. Russia is still pretty unfavourable because of political intervention and because it is effectively a pseudo-energy play.”
“It is a tricky market, but if you can get a decent BRIC manager who can make the right calls in Russia, then that is good news. In Brazil there is a far broader selection of different companies to invest in.”
“India is the same, but like Brazil, investors have been burnt by movements in the currency,” he added.
Another potential issue facing investors who want pure BRIC exposure is that there is a dearth of options available.
Our data shows that there are only three pure BRIC funds in the IMA universe – Allianz BRIC Stars, HSBC GIF BRIC Markets Equity and Templeton BRIC.
The only one of these funds that is available to retail investors is the £317m Allianz BRIC Stars fund.
According to FE Analytics, it has marginally outperformed the MSCI BRIC index over five years, with returns of 49.5 per cent.
Performance of fund vs index over 5yrs
Source: FE Analytics
Allianz BRIC Stars has 34 per cent in China compared with the 45 per cent of its benchmark, while it is also underweight Brazil.
The country makes up 25 per cent of the index but just 16 per cent of the fund. It has 20 per cent in India compared with the 14 per cent of the benchmark, and 12 per cent in other countries.
The fund has an ongoing charges figure (OCF) of 1.98 per cent and requires a minimum investment of £500.
There is, however, a much vaster selection of country-specific BRIC funds. For instance, one of the most consistent performers in the IMA China/Greater China sector has been Vanessa Donegan’s Threadneedle China Opportunities fund.
The £82m fund is a top-quartile performer over one, three and five years, and has also beaten the MSCI China index over this time. It has an OCF of 1.74 per cent and requires a minimum investment of £2,000.
Other top-performing BRIC country-specific funds include Jupiter India and BNY Brazil Equity, both of which have beaten their respective benchmarks since launch.
