Positions in Korea, Taiwan and India have helped contribute to a first-quarter gain for the JOHCM Global Emerging Markets Opportunities fund during the first quarter after a bottom-quartile performance in 2016.
The fund, which aims to generate long-term capital growth combining top-down views and bottom-up stock selection, failed to outperform its MSCI Emerging Markets benchmark last year.
The £214m fund generated a bottom-quartile performance in 2016, returning 26.34 per cent compared with the IA Global Emerging Markets sector average of 30.84 per cent and a 32.63 per cent rise in the index.
However, during the first quarter of the year the fund returned 12.13 per cent compared with a 10.13 per cent gain in the index and a 11.03 per cent rise for the average sector fund.
Performance of fund vs sector & benchmark over Q1
Source: FE Analytics
James Syme, who manages the fund alongside Paul Wimbourne, said: “The first quarter of the year [was] one in which emerging markets generally performed strongly.
“In sterling terms the emerging markets index was up over 10 per cent in the quarter continuing the strong rise since 2016.
“The portfolio outperformed in the quarter, in particular some of the cyclical holdings we have in certain Asian countries, particularly Korea and some Chinese names.”
Much of the fund’s strong performance during the first quarter of the year has come through the manager’s positive top-down view on South Korea, Taiwan and India; countries that Syme described as the “backbone” of performance during the first quarter.
India is one of the fund’s largest overweight positions relative to the benchmark, representing 18.5 per cent of the portfolio.
Syme said: “India continues to have a very strong top-down story driven by deleveraging and a reduction in inflation and interest rates.
“There is a highly reformist government that continues to pass very significantly positive reforms. At the same time, the general election is starting to loom on the horizon; we would expect more stimulus from Indian policymakers over the remainder of 2017.”
Two other large country weightings in the portfolio include Korea and Taiwan, making up 20.8 per cent and 18.5 per cent respectively.
The manager said: “Korea and Taiwan are very much globally cyclical economies and in some senses the upstream of the world economy. It does include some areas such as capital goods and chemicals but particularly, at the moment, it also involves technology.
“We’ve seen very strong returns from the technology sector globally, as well as in emerging markets, which come from the increasing role of the internet and the infrastructure that it services: whether that is more in data centres and web servers and technology that goes into those, or mobile handsets and consumer products and the technology that goes into those.”
Technology stocks make up 32 per cent of the portfolio and are represented in the top 10 by Korean firm Samsung and Taiwanese hardware company Taiwan Semiconductor.
Syme is particularly bullish on Korean equities which he says remain undervalued and misrepresented.
“We’ve seen strong returns from Korean equities led by the technology sector over the past few months,” he explained. “At the same time Korean equities remain very cheap. We think that cheapness is driven by perception of poor governance risk, [but] we’ve seen very real drivers to improve that.
“What we see in Korea is a globally cyclical export economy, particularly in technology with very strong governance, and a reform story which has been rewarded for both strong operational performance and attractive valuations.”
The fund’s largest exposure is to Chinese stocks, representing 21.5 per cent of the portfolio, although that remains a 5.4 per cent underweight to the benchmark.
He said: “We think the stimulus will slow in 2017. We believe there are growing credit risks but do not expect those to really trigger in 2017.”
Syme said there could be significant downward pressure on the renminbi but says it’s likely to present a greater problem for economies dependent on Chinese demand.
He added: “We have a cautious view on China overall and as a result we’re cautious on commodities and commodity economies.”
Yet, Syme said he continues to see opportunities in China, particularly in the “new economy or growth part of the economy” and in areas such as consumer products and non-financial services rather than state-owned enterprises or the banking system.
Looking ahead to the remainder of 2017, Syme says the fund will remain positioned towards global growth particularly through exposure to Korea,Taiwan and China on a very selective basis.
The manager remains positive on India despite higher valuations, which he says has the best growth story in emerging markets.
Syme remains cautious on commodities and commodities-focused economies such as Brazil and other Latin American economies like Peru and Chile.
“The one commodities economy where we are positive is Russia,” he said. “In Russia we have seen wage growth running ahead of consumption and retail sales for over a quarter: we think we’re now seeing a catch-up of that. Our preference in Russia is very much for domestic and consumer plays like retailers and banks.”
He added: “There may be opportunities in oversold markets,” he added. “Turkey is a market we’re very negative on; we see the greatest worsening in politics and governance in the emerging markets universe. Whereas Mexico - with the de-rating and where currency is cheap - may be more interesting if we get more clarity about the [US president Donald] Trump administration’s aims for NAFTA [North American Free Trade Agreement].”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years the fund has returned 48.84 per cent, compared with a gain of 36.89 per cent for the average sector fund and a 38.02 per cent rise for the index.
According to its key investor information document (KIID), the fund has a 5 per cent entry charge. It also carries a 15 percent performance fee if the fund outperforms the benchmark on an annual basis; any underperformance is carried forward. Last year the fund did not charge a performance fee. Its ongoing charge figure (OCF) was 1.04 per cent for the year.