The emerging markets sector has been the darling area of the equity market in 2016, having recovered strongly from February’s sell-off to achieve a positive average return of 4.31 per cent year-to-date compared to the MSCI AC World’s return of 2.15 per cent.
This is a far cry from how the sector has been performing over the last few years, with 2013’s taper tantrum, high levels of dollar-denominated debt and the collapse in commodity prices just some of the headwinds that have bruised the market area.
Now that the dollar strength appears to be slowing and oil prices have been creeping back up, investors have been increasing their exposure to the sector to hunt for attractive value opportunities.
One of the caveats with investing in the sector though is that the ongoing charges figures for many of the funds are particularly high, with the average OCF in the sector 1.2 per cent – which is one of the reasons why the ‘average’ active fund in the sector has failed to beat the MSCI Emerging Markets index over five and 10 years.
That said, FE Trustnet has delved under the bonnet of the sector and has found that there are five funds within the space that are highly-rated, have delivered above-average returns over five years and have a clean OCF of below 1 per cent. They’re listed in the below article:
Baillie Gifford Emerging Markets Growth – 0.83% OCF
First up is Baillie Gifford Emerging Markets Growth, which has five FE crowns and has been headed up by Richard Sneller since 2005, who was joined by co-manager Mike Gush last year.
The fund is £416m in size and adopts a bottom-up stock-picking process with a growth bias – this has resulted in a portfolio of 77 holdings spread regionally across the Pacific Basin, Asia Pacific, The Americas and South Africa.
A number of these holdings are large-cap household names, with its list of top 10 holdings including Tencent, Samsung, Alibaba and Baidu.
Sneller and Gush look for stocks that are likely to grow faster than the markets expects them to and these are holdings that are bought on a three-to-five year view, resulting in a low portfolio turnover.
Over five years, the fund has provided a loss of 5.93 per cent, outperforming its sector average and MSCI Emerging Markets benchmark by 4.83 and 5.84 percentage points respectively.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
However, it has a below-average Sharpe ratio (which measures risk-adjusted returns) and a higher-than-average maximum drawdown (which measures the most potential money lost of bought and sold at the worst times) as well as a bottom-quartile annualised volatility over the same time frame, suggesting the fund may not be suitable for more cautious investors.
AXA Framlington Emerging Markets – 0.88% OCF
The emerging markets fund with the second-lowest OCF on the list is AXA Framlington Emerging Markets, which has four FE crowns and was launched in 2011.
Managers Ian Smith and Paul Birchenough have been at the helm of the fund for just over a year, after Julian Thompson stepped down in June 2015 as part of a team reshuffle.
Since then, the fund has made a loss of 4.79 per cent compared to its sector average’s loss of 10.08 per cent and its benchmark’s loss of 10.75 per cent. The £116m fund has also achieved a top-quartile annualised volatility, Sharpe ratio and maximum drawdown over the same time frame.
Like the Baillie Gifford fund, AXA Framlington Emerging Markets holds large weightings in stocks that higher up the cap spectrum, also investing in the likes of Baidu, Tencent and Samsung.
In terms of region, the long-term growth fund holds 22.79 per cent in China, 12.45 per cent in Taiwan, 11.86 per cent in South Korea and 7.51 per cent in Mexico alongside other smaller weightings in South Africa, the Philippines and Thailand.
In their latest available fund fact sheet released at the end of March, Smith and Birchenough said: “Our portfolios continue to be positioned for a relatively weak global growth environment. We remain underweight materials, energy and industrials.”
“The fund’s overweight positions include healthcare, consumer discretionary and consumer staples.”
Threadneedle Global Emerging Market Equity – 0.91%
Irina Miklavchich has managed the four crown-rated Threadneedle Global Emerging Market Equity fund for more than five years, navigating a series of headwinds and providing a total loss of 6.49 per cent, outperforming its sector average and benchmark by 5.32 and 6.27 percentage points respectively.
Performance of fund vs sector and benchmark under Miklavchich
Source: FE Analytics
The £237m portfolio consists of 104 stocks spread across seven sectors including consumer products, financials, telecoms, basic materials and industrials. To find these stocks, the fund adopts of blend of both growth and value investing and will opt for mostly large-caps– these include Taiwan Semiconductor Manufacturing, Tencent, Samsung Electronics and China Mobile.
Threadneedle Global Emerging Market Equity’s team select their stocks through in-house research and company meetings – the team holds around 800 company meetings each year –and its decisions are based on the firms’ performance drivers as well as a set of risk parameters.
However, the team also adopts an understanding of macro trends alongside its bottom-up stock selection process.
In terms of risk metrics, the fund has delivered a second-quartile Sharpe ratio, annualised volatility and maximum drawdown
Newton Global Emerging Markets – 0.95% OCF
Next on the list is Newton Global Emerging Markets, which is five crown-rated and is £40m in size.
It has been managed by Rob Marshall-Lee since September 2013, who is also the investment leader of the emerging market team at Newton and is a leader on the thematic research desk.
As to be expected with a Newton fund, it adopts a top-down global thematic process when it comes to stock selection and combines this with the search for high-quality stocks with good governance that deliver strong returns on their capital. Marshall-Lee will also aim to buy into firms that deliver under-recognised earnings or compounding companies that generate strong cash flows.
This has resulted in a portfolio of 65 stocks, a majority of which are domiciled in the Pacific Basin, Asia Pacific and South Africa, and each holding can consist of a maximum of 5 per cent of the portfolio.
This has stood the fund in good stead as, over the manager’s tenure, it has provided a positive total return of 17.42 per cent, compared to its sector average and benchmark’s losses of 1.17 and 2.05 per cent respectively.
While it has also achieved a below-average maximum drawdown and a top-quartile Sharpe ratio over the same time frame, it is more volatile than many of its peers.
Henderson Emerging Markets Opportunities – 0.95% OCF
The final highly-rated fund in the sector with a five-year track record and an OCF of less than 1 per cent is Henderson Emerging Markets Opportunities.
The four crown-rated fund has been headed up by FE Alpha Manager Glen Finegan since February last year following his departure from First State (now Stewart Investors), after the emerging market equity team managed the fund collectively from 2014 following the departure of Chris Palmer.
Over Finegan’s tenure, the £200m fund has made a loss of 2.88 per cent, outperforming its sector average and benchmark by 7.77 and 7.7 percentage points respectively.
Performance of fund vs sector and benchmark under Finegan
Source: FE Analytics
Finegan adopts a non-index approach to investing and aims to buy stocks that are high quality and trading on attractive valuations. Currently, the portfolio consists of 62 holdings – 17.2 per cent of these are food producers, 13.19 per cent are banks and 9.87 per cent are in telecom, media and technology firms.
It also has smaller weightings in basic materials, consumer products, automotive firms and industrials.
These stocks are also chosen using a “conservative” approach to risk, and as such, the fund is in the top quartile for its annualised volatility, Sharpe ratio and maximum drawdown over the manager’s tenure.
