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The funds topping 2016’s best performing sector

15 August 2016

FE Trustnet finds out which funds are leading the IA Global Emerging Markets sector and how their long-term track records stack up.

By Gary Jackson,

Editor, FE Trustnet

Aberdeen’s flagship emerging market funds are among the portfolios making some of the highest returns in best performing sector of 2016 so far, although research by FE Trustnet shows that some of the peer group’s other surging funds have less than impressive long-term track records.

Emerging markets have been the place to be invested over the year-to-date as signs of a stabilising economy in China, suggestions that the US Federal Reserve might be more dovish than expected and recovering commodity prices led to a bounce-back in this previously unloved asset class.

FE Analytics shows that both the MSCI Emerging Markets index and the average fund in the IA Global Emerging Markets sector have made total returns of more than 30 per cent in 2016 (in sterling terms), outpacing UK and wider developed markets equities.

Performance of sector vs indices over 2016

 

Source: FE Analytics

Indeed, the IA Global Emerging Markets is the Investment Association’s best returning peer group over the year so far – followed by IA Japanese Smaller Companies with a 26.89 per cent average return.

In an article last month, we looked at how sentiment towards global emerging markets – which underperformed developed markets in 2013, 2014 and 2015 – is moving into positive territory as the rebound continues.

A poll of more than 2,000 of our readers in July found that 30 per cent believe emerging markets offer the best investment opportunities for the remainder of the year. This is up from just 9 per cent in a similar survey we carried out at the start of 2016.

Meanwhile, the latest CFA UK Valuations index shows that more professionals investors see emerging market equities as undervalued than overvalued. In contrast, the consensus for developed market equities, government bonds, corporate bonds and gold is that they are appearing overvalued.


A closer look into the IA Global Emerging Markets sector shows that total returns for 2016 to date range from 47.15 per cent for the peer group’s best performer to 11.83 per cent for the worst. The below table shows those funds at the very top of the table.

 

Source: FE Analytics

As has been seen in a number of sectors this year, some of the highest returns have been made by portfolios have largely underperformed in previous years.

FP Henderson Rowe FTSE RAFI Emerging Markets, the top performer, was in the bottom quartile during 2015, 2014 and 2013. The fund tracks the FTSE RAFI Emerging index, which is a smart beta index weighted using a composite of fundamental factors and designed to avoid over-exposure caused by following “market fads”.

NFU Mutual Global Emerging Markets, in second place with a 43.81 per cent total return, was also bottom quartile in the three previous full calendar years as well over on a cumulative basis over three and five years.

Other funds that have less than stellar track records over the longer term but are in the top quartile for 2016 to date include Templeton Global Emerging Markets and Newton Emerging Income.

Performance of funds vs sector and index over 3yrs

 

Source: FE Analytics

However, that’s not to say that all of the fund’s in the IA Global Emerging Market sector’s first quartile have underperformed in other recent years.


Aberdeen Emerging Markets Equity and Aberdeen Global Emerging Markets Equity have turned in first quartile numbers on a five- and 10-year view. As the graph below shows, both have made more than double the return of their average peer over the past decade after gaining over 200 per cent.

Performance of funds vs sector and index over 10yrs

 

Source: FE Analytics

On a three-year view, things have been more challenging for the funds: Aberdeen Emerging Markets Equity is in the sector’s second quartile while Aberdeen Global Emerging Markets Equity is in the third.

But the team behind the funds, which is headed by Devan Kaloo (who is also Aberdeen’s global head of equities), is well respected by investment analysts and the two funds are common occurrences on buy lists.

Square Mile said: “We have a high regard for the Aberdeen management team and their well­tested process, which over the long run has provided strong returns for investors.”

“The unconstrained mandate and the emphasis on quality means that the fund can deliver a highly variable performance relative to the index, although in general, it has tended to defend well in falling markets. The fund may not suit investors that seek benchmark­like returns but we think it holds appeal for investors with a long­term horizon.”

Lazard Emerging Markets and JPM Emerging Markets are other funds in the top quartile over 2016 to date that have also performed well over the long term. Their respective returns of 139.97 per cent and 130.27 per cent over 10 years puts them well clear of the 103.34 per cent made by their average peer.

As a point of interest, if the popular Stewart Investors Global Emerging Markets and Stewart Investors Global Emerging Markets Leaders were still members of the sector, they would have been on cusp of the second and third quartiles with respective gains of 33.77 per cent and 32.86 per cent in 2016.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.