It’s no secret that emerging markets has become the darling sector of 2016, with the MSCI Emerging Markets index rocketing ahead of other indices after five years of lacklustre performance.
According to data from FE Analytics, the index has more than doubled the performance of the FTSE 100 and MSCI Europe ex UK indices year-to-date and has outperformed the Nikkei 225 and the S&P 500 by more than 10 percentage points with a return of 31.69 per cent.
Performance of indices in 2016
Source: FE Analytics
This means the current environment is particularly difficult for active managers to outperform their benchmarks, but that doesn’t mean it’s impossible.
In an article published last week, FE Trustnet looked at the funds that have managed to outperform their benchmarks to-date since 12 February, when emerging markets bottomed out. Top-performers included the likes of Jupiter Global Emerging Markets, BNY Mellon Brazil Equity and Pictet Russian Equities.
However, those that are interested in buying into the market area but have a lower risk tolerance and a long-term time horizon may wish to consider the ‘Steady Eddie’ funds that have been lost in the market place’s sudden rally over recent months.
As such, FE Trustnet decided to look at the funds within the IA Global Emerging Markets sector which are in the bottom quartile for their returns in 2016, but have outperformed their average peer over three and five years.
From these, we selected the funds that have also managed to achieve a top-quartile annualised volatility, maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times), Sharpe ratio (which measures risk-adjusted returns) and downside risk (which estimates potential to lose money during down markets) over five years.
Of course, each of these funds must have had the same manager at the helm over this time frame and, with the usual adage that past performance is no guide to future performance, a total of four funds within the emerging market sector passed through these filters:
Carmignac Portfolio Emerging Discovery
First up is the five crown-rated Carmignac Portfolio Emerging Discovery fund, which has been headed up by Xavier Hovasse since 2011.
The €355.9m fund is domiciled in Luxembourg but is still available to retail investors on a number of investment platforms.
While it is in the bottom quartile year-to-date, having halved the performance of both its sector average and its MSCI Emerging Markets Mid Cap benchmark over this time frame, it is in the top quartile for its total returns over three and five years.
Over Hovasse’s tenure, it has returned 14.37 per cent, outperforming its sector average and benchmark by 8.67 and 12.8 percentage points respectively. It is also in the top quartile for its maximum drawdown, annualised volatility, downside risk and Sharpe ratio over the same period.
Performance of fund vs sector and benchmark under Hovasse
Source: FE Analytics
The fund aims to outperform its benchmark over five years and does so through a portfolio of small and mid-cap emerging market stocks as well as some frontier holdings.
The manager and his team combine both a top-down and bottom-up selection process when choosing stocks, focusing on each company’s cash generation and long-term growth potential. They also take into account whether the companies operate in unpenetrated sectors and within economically sound countries.
The fund has a greater focus on Asia than it has done in previous years due to the region’s strong growth and investment prospects – it currently has a 56.76 per cent weighting in Asia, as well as a 29.94 per cent weighting in Latin America and smaller weightings in the Middle East, Eastern Europe and Africa.
Carmignac Portfolio Emerging Discovery has a clean ongoing charges figure (OCF) of 1.3 per cent.
Next up is FE Alpha Manager Nick Price’s Fidelity Emerging Markets fund, which is £1.4bn in size and has a portfolio of 81 stocks.
Year-to-date, the five crown-rated fund has underperformed its sector average by 8.6 percentage points with a total return of 21.22 per cent. While it does not have an index as a benchmark, it has performed broadly in-line with the MSCI Emerging Markets index.
However, it is in the second quartile for its three-year total returns and has outperformed both its sector average and the index by more than 20 percentage points over five years with a total return of 44.16 per cent. It is also in the top quartile for its annualised volatility, maximum drawdown, Sharpe ratio and downside risk over three and five years.
Price focuses on areas of the emerging market space that are experiencing rapid economic growth such as South East Asia, Eastern Europe, Latin America and the Middle East.
Within these regions, the team aims to find businesses that hold strong market positions within their field and are able to compound earnings growth throughout an entire cycle. Price also takes into account currency risk, geopolitical and economic risks that are implicit in the region the company resides in.
Fidelity Emerging Markets has a clean OCF of 1.07 per cent.
MI Somerset Emerging Markets Dividend Growth
The third fund on the list is the four crown-rated MI Somerset Emerging Markets Dividend Growth fund, which has been managed by FE Alpha Manager Edward Lam since 2010.
Again, the fund is in the bottom quartile for its total return year-to-date as well as over the last year, but has achieved strong returns over the medium and longer term.
Over five years, it has outperformed its sector average and the MSCI Emerging Markets index (although it must be noted the fund is not benchmarked against an index) by 18.21 and 15.55 percentage points respectively with a total return of 40.52 per cent. The fund is also in the top quartile for all aforementioned risk metrics over the same time frame.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Lam holds a concentrated portfolio which currently stands at 49 stocks. These holdings sit across the cap spectrum – while more than a quarter of the stocks are less than $5bn in size, 51 per cent of the holdings are between $5bn and $20bn, 12.5 per cent are between $20bn and $50bn and the remaining 12.5 per cent is above $50bn.
The research team at Square Mile, which has awarded the fund an ‘AA’ rating, said: “The fund may lag in strongly rising markets but we think the preference for firms with resilient revenue streams can help cushion losses when markets are falling.”
“This is an attractive offering with a total return objective for investors that are seeking exposure to the emerging markets arena.”
MI Somerset Emerging Markets Dividend Growth has a clean OCF of 1.3 per cent and yields 1.9 per cent.
Threadneedle Global Emerging Market Equity
Irina Miklavchich’s four crown-rated Threadneedle Global Emerging Market Equity fund is the final fund to make it onto the list, having achieved strong long-term returns and risk metrics but slipping into the bottom quartile for its return year-to-date.
Over five years, the fund has returned 29.28 per cent compared to its sector average’s return of 23.08 per cent and its MSCI Emerging Markets benchmark’s return of 24.97 per cent. In terms of its risk metrics, it is in the second quartile for its maximum drawdown and Sharpe ratio and is in the top quartile for its annualised volatility and its downside risk.
The £284m fund has a total of 78 holdings, a third of which are based in the Pacific Basin. It also has smaller weightings in the Americas, Asia Pacific, Europe ex UK and South Africa.
These stocks are chosen through a combination of bottom-up stock selection and the understanding of macroeconomic trends – the manager has a particular focus on risk parameters when choosing holdings and makes use of Threadneedle’s in-house research team.
Threadneedle Global Emerging Market Equity has a clean OCF of 0.92 per cent and yields 1 per cent.
