It has been dominated by First State and Aberdeen over the past decade, with funds from each group dominating the top quartile over one, three, five and 10 years. However, this outperformance has a come at a cost to new investors.
First State has now soft-closed its Global Emerging Markets and Global Emerging Markets Sustainability funds to keep assets under management at workable levels, and it is slowing inflows into the Global Emerging Markets Leaders fund.
Aberdeen has also followed a similar path by closing its top-performing Emerging Markets and Global Emerging Markets Smaller Companies funds, in order to protect the interests of current investors.
While emerging markets have had a tough time of it of late, there is no doubt that there are huge opportunities for high returns from these economies as their GDP grows and their standard of living increases – but how is it possible to access that growth via an open-ended investment vehicle?
One fund that is stepping into the limelight is Julian Mayo’s Charlemagne Magna Emerging Markets Dividend fund. The £105m portfolio was launched three years ago today and its numbers so far are very strong, despite the fact that investor sentiment has been poor.
According to FE Analytics, the fund is a top-quartile performer since launch, with returns of 24.03 per cent, beating the IMA Global Emerging Markets sector by more than 20 percentage points.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund is the fourth-best performer over one year, with returns of 16.57 per cent, compared with the sector’s 5.87 per cent. Charlemagne Magna Emerging Markets Dividend has also been considerably less volatile than the sector over both periods.
Mayo’s portfolio has beaten Aberdeen Emerging Markets over both one and three years, and First State Global Emerging Markets over the shorter time period as well.
It has a headline yield of 5 per cent – the second highest in the sector – and our data shows the fund has increased its net distribution over the last 12 months.
There are a number of emerging market income funds available to UK investors, but Mayo’s is only the second to gain a three-year track record and has the best record since inception.
Mayo told FE Trustnet that he is excited about the prospects for his fund and that he expects to see substantial inflows.
"I’m very optimistic," he said.
"We have had good performance and we are now seeing good inflows into the fund. People are back-tracking from emerging markets, but at some stage that will normalise. Valuations are at all-time lows, but the demand for yield isn’t going to go away."
"The best ways for investors to access emerging markets have now been closed, but they have no choice but to have emerging markets in their portfolio as they make up 50 per cent of the world economy and that figure is growing."
"Within that, there are a huge amount of investment opportunities for us," he added.
Charlemagne Magna Emerging Markets Dividend is constrained to a benchmark and so Mayo is free to invest across the emerging markets universe. He says he relies on a bottom-up approach and his team’s expertise to drive returns.
"Firstly, we are stockpickers, so if we don’t like something, we won’t buy it," he said.
"The second part is that because we are emerging market specialists at Charlemagne, we can find inefficiencies in medium-sized, less well-known companies. We think we can add more value in second-tier companies."
"The way we go about choosing stocks is by getting out on the road and understanding what makes companies tick. We have 15 analysts on the team that spend a lot of time visiting management teams; therefore we can decide which the best ones to invest in are."
"For instance, next week three of my team are going to Colombia, Peru and Chile, while I’m off to Korea."
"We hold good-quality businesses where the management teams are willing to talk to us regularly. These are companies with good cash-flows and underleveraged balance sheets, but if they are in that category, then they are usually the companies that reward shareholders with dividends."
"That’s the key point to this strategy, as the dividends come right at the end – we don’t try to chase yield."
Mayo runs a concentrated portfolio of just 49 holdings; however the Charlemagne Magna Emerging Markets Dividend fund is well diversified across emerging economies.
Companies from South Africa, Thailand, Turkey, China, Mexico, Poland and Brazil are all in its top-10 holdings. Mayo’s largest sector weightings are to financials and consumer discretionary stocks, making up 38 and 20 per cent of the portfolio, respectively.
Investors will be all too aware that emerging market equities have underperformed their developed rivals recently. The MSCI Emerging Markets index has returned just 0.28 per cent over three years, while the FTSE All Share has returned 38.71 per cent and the S&P 500 52.17 per cent.
Performance of indices over 3yrs
Source: FE Analytics
However, Mayo says that this trend cannot continue.
"Yes, emerging market growth and corporate earnings have slowed down, but they are still in reasonable shape," he said. "Valuations are now very, very low. The average emerging markets company has a P/E ratio of 10x earnings, which is at its lowest level in 25 years."
Nevertheless, the manager says his style of focusing on top-quality businesses that pay dividends is the best strategy while the outlook is uncertain.
"The companies that we are investing in are quite defensive in some respects. We are up by about 7 percentage points against the MSCI Emerging Market index this year."
"It is the companies with more operational gearing and that are lower quality that have struggled and will continue to do so," he added.
Charlemagne Magna Emerging Markets Dividend has an ongoing charges figure (OCF) of 1.75 per cent and requires a minimum investment of £5,000.
