Allianz Emerging Markets Equity, Baillie Gifford Emerging Markets Growth and GS Emerging Markets Equity Portfolio are among some of the funds to achieve the strongest returns during emerging market rallies over the last decade, according to research from FE Trustnet.
Emerging markets have received a lot of attention from investors recently. Following the increase in oil and commodity prices as well as dovish statements from the Federal Reserve at the start of the year, the MSCI Emerging Markets index has rallied year-to-date, achieving a total return of 40.82 per cent (in sterling terms) compared to the FTSE 100’s return of 15.86 per cent.
Performance of indices in 2016
Source: FE Analytics
This is a far cry from how the market has performed in the not-too-distant past, given the index struggled significantly over five years to the end of 2015. 
Now though, many investors believe emerging markets have reached a turning point and are set to continue outperforming their developed market peers over the medium term.
In an article published last week, FE Alpha Manager Edward Lam (pictured) told FE Trustnet the emerging market rally is likely to continue, given that improving fundamentals haven’t even been factored in yet.
“There are many more opportunities in the last few months than 18 months to a year ago and a lot of those are to do with how badly markets have performed in 2015,” the Somerset manager said.
Orbis Investment’s Dan Brocklebank also believes emerging markets offer far more upside from here, telling FE Trustnet last Monday that the divergence between emerging and developed markets is almost back to where it was at the turn of the millennium.
As such, we decided to take a look at the emerging market funds that have delivered the strongest outperformance versus their benchmarks during rising markets over the last decade. Of course, the usual adage that past performance is no guide to future returns applies.
We focused on funds’ upside capture, which shows a fund’s performance in an up market relative to its benchmark. If its score is greater than 100, it suggests that the fund outperformed on average during rising markets.
We found that four funds within the IA Global Emerging Markets sector have achieved an upside capture ratio of more than 115 per cent over the last decade.
The strongest performer during rising markets has been Allianz Emerging Markets Equity, which boasts an upside capture ratio of 145.54 per cent over 10 years. The five crown-rated fund has been headed up by Kunal Ghosh since 2013 and is £210m in size.
Over the last decade, it has returned 86.46 per cent compared to its sector average and benchmark’s returns of 101.84 and 119.48 per cent respectively. This is largely a function of the fund’s tendency to fall harder than the index in down markets.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
While it has fallen into the bottom quartile during five out of the last 10 years, it achieved top-decile returns in 2007, 2009 and 2014. 2007 and 2009 in particular were strong years for emerging market equities and the fund delivered significantly more than the MSCI Emerging Markets index during these times.
It is in the bottom decile for its maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times) and annualised volatility over this time frame.
The emerging market fund with the second-highest upside capture ratio over the last decade is T. Rowe Price Emerging Markets Equity at 121.6 per cent.
The fund, which is domiciled in Luxembourg, is $1.6m in size and has been managed by Gonzalo Pangaro since 2009.
The 89-stock portfolio has underperformed both its sector average and benchmark over the same years that Allianz Emerging Market Equity has and, similarly, it has achieved top-decile returns over the years when the market has rallied.
Year-to-date, for instance, it is up 44.64 per cent compared to its benchmark’s return of 40.82 per cent and its sector average’s return of 39.56 per cent.
In terms of its total return over 10 years, it has performed broadly in line with its peers but has underperformed the MSCI Emerging Markets index by 15.5 percentage points with a return of 103.98 per cent.
As to be expected, it is in the bottom quartile for its maximum drawdown, annualised volatility and downside risk (which estimates a fund’s potential to lose money during falling markets) over 10 years.
The third fund on the list is GS Emerging Markets Equity Portfolio, which has five FE crowns and has an upside capture ratio of 117.7 per cent over 10 years.
The five crown-rated fund is team-managed and was launched in 1996. Also domiciled in Luxembourg, it is $1.4bn in size and consists of 140 holdings.
Over 10 years, it has returned 79.3 per cent compared to its sector average and benchmark’s respective returns of 101.81 and 119.48 per cent. This is due to a bout of underperformance between 2007 and 2011. In terms of risk metrics, it is in the bottom decile for its annualised volatility and maximum drawdown.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fourth and final emerging market fund to achieve an upside capture ratio of more than 115 per cent over 10 years is Baillie Gifford Emerging Markets Growth at 116.34 per cent.
It is managed by Richard Sneller and Mike Gush, who adopt a five-year time horizon when selecting stocks.
Over the last decade, the four crown-rated fund has comfortably outperformed both its sector average and benchmark with a total return of 141.08 per cent. Unlike the aforementioned funds, it has only fallen into the bottom quartile during one year over this time frame, having struggled in 2012. That said, it is also in the bottom quartile so far this year, having underperformed its peers by 8.1 percentage points with a return of 30.65 per cent.
When it comes to risk, the fund is in the third quartile for its maximum drawdown and the bottom quartile for its annualised volatility over this time frame.