"Emerging markets go right or wrong at a country level," said senior fund manager Syme. "We have an assertively top-down approach. If we like a country, we look to have an overweight. If we don’t like a country, like in the case of Turkey, we’ll look to have a zero weighting."
While Syme and Wimborne accept there are some decent stock-picking managers operating in emerging economies, they believe that the disparities between countries mean that choosing the strongest will bring the best returns.
"Average stocks in the best markets are likely to massively outperform the best stocks in the worst markets," added Syme.
The new fund will launch on 30 June and is available to both retail and institutional investors. It will invest in companies of any size but has a focus on large to mid cap stocks.
Syme and Wimborne already manage Baring Global Emerging Markets. According to data from FE Analytics, it has returned 37 per cent over the last three years, roughly the same as MSCI Emerging Markets.
Performance of fund vs sector over 3-yrs
Source: FE Analytics
The investment process will begin with a close look at the 21 emerging economies, with an emphasis on growth potential, high liquidity, currency risks, the political situation and valuation.
"We don’t buy companies that are a significant part of the index if we don’t like them," said Syme. "We have a lot of our personal money invested in this fund and if we don’t like the look of a company then it is not good for our shareholders. Petrobras is a good example of a company of which we are steering clear."
This top-down approach has enabled Syme and Wimborne to identify companies such as Chinese nappy manufacturer Hengan. The story of Hengan is, in many ways, the type of consumer-led growth story that typifies what is driving investment in emerging markets.
"Nappies are only used by about one in three households in China, which is low by Western standards, but the adoption rate has been very rapid," said Wimborne.
"Culturally, things are changing. There is a consumer market in China now. With the one-child law there is a 'little emperor' syndrome where everything is focused on parents getting the best for their child."
"The uptake of nappies is indicative of the growing middle class and higher earnings of the average Chinese worker."
The managers are also bullish on Chinese banks, which they have identified as one of the most unloved sectors.
"They are pricing in some catastrophic event that we don’t see any evidence of," continued Syme. "The bad news is already priced in so we think they represent excellent value. There will be some non-performing loans but we don’t think it will be as bad as markets expect."
Political risk is the biggest concern in emerging markets. Many investors question the validity of a free-market China run by a communist regime.
Wimborne says the best way to approach the situation is to align with government policy.
"At the moment the government is targeting property prices coming down so it doesn’t make sense to invest in property developers," he explained. "The government wants to focus on the growth part of the economy and that is exactly where we want to be."
Political forces remain the most compelling reason why the managers stay out of certain economies.
"When non-democratic governments come to an end, the transition can be what economists call ‘non-linear’," explained Syme.
"We think Egypt represents too much of a risk right now, similarly Peru is somewhere we’ll steer clear of. The Hungarian political environment is challenging for international investors like us."