The tiny fund sits in the top quartile of IMA Global Emerging Markets over three years, its returns of 23.33 per cent beating those of the £460.8m Lazard Emerging Markets portfolio.
Although the fund is only £8.3m in size, it is run in accordance with a strategy Somerset uses on a total of $1.9bn of assets, and the concentrated, mid cap and valuation-based method gives it the potential to outperform.
Edward Robertson, lead manager on the portfolio, explains that he uses a two-pronged strategy to run the fund.
"It is a mixture of a growth-stocks approach and a quality-at-a-reasonable-price strategy, which sounds very generic, so we can break it down into two parts," he said.
"There is a core part of the portfolio, which invests in quality companies with stable earnings – those companies will demonstrate strong profitability metrics and cash-flow."
"Then there will be a small part of the fund which looks more at quality cyclicals: those which may not have good earnings at the moment but which have strong finances, so that when the earnings return, they will do well."
Robertson explains that currently around 55 per cent of the fund is invested in core companies and 36 per cent in cyclicals, although the distribution of the two parts changes as the opportunities do.
Although the fund’s three-year figures put it among the best in the sector, its performance since launch has suffered due to poor returns in 2009.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund made considerable gains – rising 28.57 per cent – but was left behind as the sector rose 57.22 per cent and the MSCI Emerging Markets index climbed 58.93 per cent.
"The portfolio was quite defensively positioned in 2009 and I do regret that," Robertson said.
"When the rally started it wasn’t until the third quarter when we had done some company visits that we started to up our risk."
"We are not market timers, so we tend to be cautious when the times are changing."
Robertson gives LG Chemicals of South Korea as an example of a company that falls into the cyclical category.
"At the moment we are in a difficult part of the petrochemical cycle, but what makes LG different is that as well as producing commodity chemicals it produces specialist chemicals, and nobody else in Asia can do that, so that when the economics return, that company should be able to do well in that environment," Robertson commented.
Data from FE Analytics shows that the Somerset Global Emerging Markets fund is one of seven funds to hold LG Chemicals in their top-10.
The company is also a top holding in two Schroders funds – Schroder Asian Alpha Plus and Schroder Global Emerging Markets – and in three Barings funds – Baring Global Emerging Markets, Baring Emerging Markets and Baring Far East ex Japan. IM Hexam Global Emerging Markets is the seventh.
Robertson adds that he is currently finding many of the best opportunities in the much-maligned BRIC countries. Although he factors political risk into valuations, he says prices are still attractive.
Russian oil company Lukoil is a top-10 holding, and Robertson says that the Russian government has shown it is serious about improving corporate governance, with the oil sector receiving special attention.
In the past the manager ran a Russian small cap fund, giving him a unique insight into the country’s markets.
The minimum initial investment on Somerset Global Emerging Markets is £2,000 and the total expense ratio is capped at the RDR-ready figure of 1.35 per cent – making it attractive compared with many of the larger names in the sector.