Emerging markets are coming back into favour after years of being left out in the wilderness and now could be the time for investors to up their exposure to the sector, according to a number of market analysts. 
Part of the reason for this is that the UK and Europe have been plunged into uncertainty following the Brexit vote, while global issues including the US presidential election and high valuations have left investors searching further afield for value.
For years, emerging markets have been avoided by investors as cyclical challenges have led to poor returns.
Performance of indices over 5yrs
Source: FE Analytics
Falling commodity prices hit the developing world, known for its production of industrial metals, while a stronger US currency has made dollar-denominated debt more expensive, putting pressure on governments and businesses.
But these trends are reversing, according to the BlackRock Investment Institute, which adds that an added bonus could be that weaker currencies (particularly in the UK) is leading to improving trade balances.
Another reason why investors have been cautious is the fear that China’s economy is heading towards a hard landing and while this may still prove to be a factor, it is important to remember that emerging markets are made up of a number of different countries and shouldn’t be viewed as a homogenous group.
BlackRock certainly isn’t alone in backing emerging markets at the moment, with both NN Investment Partner’s Valentijn van Nieuwenhuijzen and Ashmore’s Jan Dehn telling FE Trustnet over recent weeks that developing world equities could be entering a bull market.
With this in mind, here are the three funds chosen by industry commentators for investors wanting to gain exposure in the emerging markets.
JP Morgan Emerging Markets Income
Adrian Lowcock, head of investing at AXA Wealth, says emerging markets look “pretty cheap on a number of valuation metrics” but warns that they have yet to hit the very bottom.
As a result, he says investors should “drip feed money in slowly and be prepared to wait”, suggesting a fund that would work with this sort of strategy is JP Morgan Emerging Markets.
Managers Omar Negyal, Richard Titherington and FE Alpha Manager Amit Mehta have the flexibility to switch between defensive and cyclical assets to best capitalise on market opportunities, he says, giving it freedom to take advantage of varying market conditions.
“The income focus of the fund lends itself to a defensive approach and means investors can access emerging markets and earn an income while they wait for the market to perform,” he said.
Since its launch in August 2012, the £285m fund has performed consistently with its benchmark and sector, as the below graph shows.
Performance vs sector and benchmark
Source: FE Analytics
So far in 2016, it is ranked third among its peers, returning more than 33 per cent to investors since January, turning around from a disappointing 2015 where it was in the bottom decile.
Another fund worth a look is the five crown-rated Fidelity Emerging Markets fund, according to Parmenion investment manager Stephen Lennon, who says he has been very impressed with its performance.
“One of our favoured funds in [the emerging markets] sector is Fidelity Emerging Markets run by Nick Price,” he said.
“He’s an incredibly experienced guy, he’s a South African national and he’s very much focused on bottom-up fund stock picking and he’s looking through companies’ earnings to see where they come from.”
Performance vs sector and benchmark
Source: FE Analytics
The £1.2bn fund has outperformed its sector and benchmark since 2013 and has been in the quartile among its peer group in three of the six years since its launch (2011, 2013 and 2015).
Lennon said: “At first glance the portfolio seems pretty overweight South Africa but in fact what he’s doing is buying South African companies that have a fair amount of income from sub Saharan Africa so it’s a very diverse portfolio and the risk-adjusted returns have been excellent.”
The fund’s risk-adjusted return, as shown by its Sharpe ratio, ranks it in the top decile among its peers, while its maximum drawdown, or the amount an investor would have lost had they invested and sold at the worst possible time, is below the sector average.
Lennon adds that FE Alpha Manager Price’s investment style - measuring how volatile a stock has been before looking at its performance - fits well with the Fidelity Emerging Markets fund, which ranks in the top decile for volatility among its peers over a five-year period.
“This fund is one of the few that over the long term has really managed to outperform the sector but also exhibited lower volatility,” he said.
Hermes Global Emerging Markets
The third and final fund on the list is the five-crown rated Hermes Global Emerging Markets fund, headed up by FE Alpha Manager Gary Greenberg.
The fund, which is among a few emerging market funds to be on the FE Invest Approved list, is the heir to portfolios he has run for the BT pension scheme since 1993.
Performance vs sector and benchmark
Source: FE Analytics
“Relative performance took off in spring 2013 as the markets began to adjust to the ending of the US’ QE programme,” the FE Research team said.
“Since then the fund has been helped by avoiding countries with weakening currencies, a focus on the consumer and technology sectors and a lack of exposure to commodities which have suffered.”
The fund is in the top quartile for volatility and maximum drawdown versus its peers over a five-year period, and had a three-year run of top decile performances from 2013 to 2015.
The FE Research team said: “Greenberg has successfully navigated a tough period for emerging markets since taking over, helped by a focus on growing consumer demand.”
“It remains to be seen how the team will perform over the longer run, with some themes, such as dollar strength and the rise of the consumer, having been fairly consistent winners over the period of their tenure, but the fund has made a good start and is a good option for those looking for selective exposure to a region with macroeconomic concerns but huge potential in certain stocks, countries and sectors.”
