Finding a top emerging markets fund has been crucial for investors over the past three years due to the enormous political and market uncertainty surrounding the largest countries in the sector: China, Brazil and Russia.
China’s ills are well-documented. Its technology stocks dived last year as tougher regulations hit some of the market’s largest companies, while there were also issues in the property sector with the Evergrande scandal.
To top it off, more sanctions from the US over potential human rights violations – which China’s government denies – have added to the risks.
Elsewhere, Brazil was hit hard by the Covid-19 pandemic, while Russia has threatened to invade its neighbour Ukraine.
All of this makes it a tough time to invest in either Asia – where China dominates the main indices – or emerging markets.
However, some bright young funds have navigated the market adeptly in their first three years. Below Trustnet takes a look at the funds launched in 2018 that have made top-quartile returns over this period.
First up is Federated Hermes Global Emerging Markets SMID Equity, run by Kunjal Gala, which has a strong environmental, social and governance (ESG) tilt.
The fund is evenly split between countries, with Taiwan, India, China and Korea all making up more than 10% of the portfolio, although it has overweight positions in technology and industrials, which make up more than half of the total asset allocation.
This, along with its mid-cap bias, has helped it avoid some of the worst falls among the large Chinese technology stocks, while tapping into domestic success stories in countries such as India.
It was formerly headed up by veteran fund manager Gary Greenberg, who remains head of emerging markets at Federated Hermes, although he is expected to retire this year.
Total return of fund vs sector and benchmark since launch
Source: FE Analytics
The fund has made a strong start since launch in September 2018, returning 30.6% over the past three years and 37% since its inception.
The other emerging markets fund on the list is Polar Capital Emerging Markets Stars, which launched in June 2018 and has made 50.7% over the past three years – the fifth-best figure in the IA Global Emerging Markets sector.
FE fundinfo Alpha Manager Jorry Rask Nøddekær and Naomi Waistell run the fund, incorporating ESG-based analysis as part of their investment process. They also use sector specialists to inform their stock buying decisions.
Unlike the previous fund, it has a large-cap bias and although Chinese companies account for 25.4% of the portfolio, this is 7 percentage points below the benchmark index. Its largest relative overweights are to India and South Korea.
The portfolio is heavily weighted to technology stocks (37.3%) a 14.5 percentage point position relative to the benchmark, while it is underweight financials (10% of the fund, 9.4 percentage points behind the benchmark).
This combination has hurt the fund at the start of 2022, with the portfolio down 4.8%, although it made exceptionally strong gains in both 2019 and 2020 to counteract this.
In the latest factsheet, the managers said that they were “frustrated” by the performance of some of their holdings over the past year, but noted that the fundamentals had not changed and these stocks were now cheaper.
Total return of fund vs sectors and benchmarks over three years
Source: FE Analytics
Last up is the Polar Asia Stars fund, managed by the same duo as above. It shares many similar characteristics with its emerging markets relative, but has pipped it in performance terms, making 62.4% over three years.
Seven of its top-10 holdings are also in the top 10 of the emerging markets fund, although the weightings are different. Like its big brother above, the managers use ESG principles to determine stock selection and have a bias towards large-cap stocks, with similar overweights in technology companies, while underweighting financials.
“In general, we are not making large changes to our current positioning. Of the hotter topics, we feel we will reach the bottom for Chinese internet companies and we are now selectively starting to slowly add back exposure as we see favourable risks/rewards for certain companies. This also spills over to other internet-related companies in ASEAN and Korea, which seem lately to have suffered collateral damage without any real change to their operational fundamentals,” they said.
“The bottom line is we see great opportunities for our Asian Stars portfolio, with significant return potential for anyone with a 12- to 18-month investment horizon. We have historically been good at taking advantage of ‘panic periods’ and turning them into sustainable, responsible returns – we believe one of those periods is coming again.”
| Fund | Sector | Fund size | Fund managers (s) | OCF |
| Federated Hermes Global Emerging Markets SMID Equity | IA Global Emerging Markets | £340m | Kunjal Gala | 1.19% |
| Polar Asia Stars | IA Asia Pacific Excluding Japan | £317m | Jorry Rask Nøddekær, Peter Andersen | 0.98% |
| Polar Capital Emerging Markets Stars | IA Global Emerging Markets | £953m | Jorry Rask Nøddekær, Naomi Waistell | 0.99% |