With a growing number of emerging market strategies to choose from, picking the right one can often prove a minefield for investors.
Yet, demand for strategies focused on the fast-growing emerging economies remains strong, with £281m pouring into the IA Global Emerging Markets sector during the first half of the year.
The IA Global Emerging Markets sector has performed strongly in the six months to 30 June, with the average fund rising by 12.88 per cent, compared with a 7.29 per cent gain for IA UK All Companies, the largest sector by AUM.
Performance of sectors during H1
Source: FE Analytics
An increasing number of global emerging market strategies – as well as those focused on single countries and specific regions – have been launched over the years to cater to demand from investors.
Simon Evan-Cook, manager on Premier Asset Management’s multi-asset range, said there are a range of good options available for investors.
He said: “We have plenty of excellent Asian and emerging market funds that have done a great job for us over the years, such as Prusik Asian Equity Income, Hermes Asia Ex-Japan or Fidelity FAST Emerging Markets..
"But instead of those, I thought I’d talk about what I consider to be the best emerging market fund you’ll never buy: HMG Global Emerging Markets Equity."
While its €500,000 minimum investment may preclude individual retail clients from investing in the fund, it remains a strong proposition for multi-managers and advisors.
The £23.7m FCA-recognised offshore aims to achieve “significant capital growth over the long term” through investment in emerging and frontier markets.
Additionally, the fund predominantly invests in equities it considers undervalued among small and medium-sized companies.
Managed by Marc Girault – described by Evan-Cook as “a strict value investor” – and Paul Girault the fund takes a different approach than many of its peers in the emerging market space.
“His niche is to seek out emerging-market-listed subsidiaries of developed market companies,” explained Evan-Cook.
“As a starting place, this gives his companies an advantage in terms of corporate governance over many of their emerging peers, as the subsidiaries will adhere to the same standards as their parent company.
“In addition, they get the benefit of experience and economies of scale provided by their parent company too.”
The fund’s focus on small and medium-sized companies means that the holdings “don’t show up in any significant way in most mainstream emerging market funds”, said Evan-Cook (pictured).
He added: “Because they’re off the beaten track they tend to fall beneath the radar of index buyers and ETFs. Perhaps this explains why, as a group, these stocks look good value.”
According to the most recent factsheet, the fund had just 11.5 per cent of the portfolio held in large-cap stocks, compared with 73.2 weighting for the MSCI Emerging Markets index benchmark.
The fund has 59.9 per cent of the portfolio held in small-cap stocks, 18.9 per cent in mid caps and 9.6 per cent in cash.
Its top five stocks include Brazilian water company Sanepar, Senegalese telecoms provider Sonatel, Esso Thailand, shopping mall company Sonae Sierra Brasil, and Moroccan water company Lyonnaise des Eaux de Casablanca.
“The manager is personally heavily invested, and is keen to ensure his money is not overly exposed to any one region, country, industry or stock,” said Evan-Cook.
“This diversification goes some way to explain why the fund is considerably less volatile than almost all of its peers.”
Evan-Cook said that as well as offering exposure to undervalued long-term growth stocks, the fund also offers investors a “decent yield”.
The Premier manager said many of the subsidiaries held within the portfolio send profits back to their parent companies in the form of dividends.
He noted: “So, we’re being paid an income of yield of more than 4 per cent to wait for this value to be recognised.”
“So that’s: good value, decent income, sensibly diversified and run by a good manager who is well-aligned with fundholders’ interests,” said Evan-Cook. “Big ticks all round. So, why do I think you’ll never buy it?
“Partly because it has weekly redemptions. Many people, bafflingly, are simply not prepared to wait five days to get their money back from what should be a very-long-term investment.
“But mainly because its track record looks poor versus its peer group.”
Over three years, the fund has risen by just 4.12 per cent compared with a 30.54 per cent rise for the average fund from the FO Equity – Emerging Markets peer group.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
“There are several reasons for this, most notably of late it hasn’t had any exposure to the rampant Chinese tech giants that have been driving Asian and emerging indices higher,” said Evan-Cook. “But given what the manager does, I’d be highly alarmed if he did.
In its latest factsheet, the fund noted: “Although emerging markets continued to outperform weakness in the developed world, our fund fell over the quarter.
“Despite an absolute return YTD, the second quarter largely reversed the gains made in the first three months of the year.
“Over the period, style and size indices in emerging markets painted disparate pictures: small-cap value declined, lagging the gains made by large-cap growth by 7.3 per cent.
“Along similar lines, information technology (one quarter of the index) returned 11.2 per cent, while our favoured sectors, financials and utilities, were flat and down 5.5 per cent respectively.”
But that has not deterred Evan-Cook, who remains convinced by the manager’s long-term approach.
“I’m comfortable with the other reasons for its underperformance. Which is why we’ve been buying more in our funds this year,” he explained.
“But I know from experience that, no matter how much other investors say they aren’t swayed by previous performance, most are still much more comfortable buying a fund at the top of the performance tables than one at the bottom.”
He added: “It may well be that this fund will never be a top performer. But if it carries on paying us a reliable, decent and growing income, then that’s enough for us.”