Developed markets such as the US, UK and Japan have surprised on the upside with their economies seemingly in recovery mode and their equity markets rallying as a result.
Performance of indices in 2013
Source: FE Analytics
However, a strong US dollar, falling commodity prices and worries surrounding China’s financial sector have all created headwinds for emerging markets and has had a knock-on effect on both equity and fixed interest markets.
There could soon be light at the end of the tunnel, however, with emerging market bulls claiming that developing economies’ growth potential in the long-term is very much intact. On top of that, some now say that negative sentiment towards the emerging markets has gone too far and it is only a matter of time until they bounce back.
In the next of the series, FE Trustnet asks the experts which emerging markets funds they would choose for investors with a short-, medium- and long-term time horizon.
Three-year horizon: Genesis Emerging Market IT
When taking a short-term view on equities, advisers would normally highlight a more defensive fund, such as one with an income focus.
As a result, most of the experts we spoke to were wary of recommending an emerging markets fund for a three-year time-frame, as they are traditionally seen as long-term investments. However, Kilik & Co’s Gordon Smith says there is an argument for backing a trust on a healthy discount for anyone who is looking for a value play in the shorter-term.
"With a lot of things like this, one way to look at it would be to go through the listed sector," Smith said.
"As sentiment is poor towards emerging markets, there has been a lot of discount widening in the investment trust space. It means that if sentiment were to change, you would not only see the benefits of a narrowing discount but also hopefully a pickup in performance of the underlying NAV of the portfolio."
"The broad emerging markets-listed sector is on a 7 per cent discount, but there is a spread, with some on a small premium and some on a large discount."
"One we like is the Genesis Emerging Market Investment Trust, which is on a 9 per cent discount, but of course that could go wider," he added.
As Smith points out, the Genesis Emerging Market Investment Trust is currently trading close to a 10 per discount, which is much cheaper than its one-year average of 4.41 per cent.
According to FE Analytics, the closed-ended fund has been the best performing portfolio in the IT Global Emerging Markets sector over 10 years with returns of 364.98 per cent and has beaten its benchmark – the MSCI Emerging Markets index – by more than 130 percentage points.
Performance of trust vs index over 10yrs
Source: FE Analytics
However, performance has waned recently with the trust underperforming the index over the last 12 months.
Genesis Emerging Market is a diversified trust of more than 170 holdings. A vast array of developing nations are represented in the portfolio, from China to Tanzania. The trust is not geared and has ongoing charges of 1.69 per cent.
It is managed by Mark Elder.
Five-year horizon – First State Asia Pacific Leaders
Gavin Haynes, managing director at Whitechurch, says that investors should be looking for a more defensive emerging markets fund if they only want to hold it for five years and because of that favours the five crown-rated First State Asia Pacific Leaders fund.
"Certainly, for a five-year view you want more core exposure and probably something a little more defensive," Haynes said. "I like the First State Asia Pacific Leaders fund, which is managed by Angus Tulloch (pictured). He has an exceptional track record of investing in well managed companies. Capital preservation is at the forefront, but he also tries to capture as much of the upside as possible," he added.
The fund was launched in December 2003 and it is headed-up by Angus Tulloch and Alistair Thompson, both of whom are FE Alpha Managers.
First State Asia Pacific Leaders is a top-quartile performer in the IMA Asia Pacific ex Japan sector over five years, with returns of 75.62 per cent, and has comfortably outperformed the MSCI Asia Pacific ex Japan index over that time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has also weathered the recent volatility well, having beaten the sector and the index over six months, and one and three years.
However, given the fact that the fund is now at £6.8bn and that First State has soft-closed a number of its top-performing funds, Haynes says investors may have to act quickly.
The fund is currently overweight Hong Kong and India compared with its benchmark and is underweight Australia and South Korea.
First State Asia Pacific Leaders has an ongoing charges figure (OCF) of 1.55 per cent and requires a minimum investment of £1,000.
10-year horizon – GAM Star China Equity
Haynes says that investors with a long-term horizon should be taking on a higher degree of risk, which could mean buying in to a country-specific fund such as GAM Star China Equity.
"If you are looking to invest for 10 years, then I would still say China," he said. "It has phenomenal long-term potential, even though it has had a difficult period of late, but if you are buying for that period of time, now could be a good entry point."
"The fund we rate is GAM Star China Equity, which is managed by Michael Lai. Clearly, there are a lot of companies in China you want to avoid but he is a proven stock picker and tends to hold just 40 stocks."
"He adopts a contrarian view which we like because he is looking for out-of-favour stocks that have strong recovery potential."
"It is a very good fund for those investors who are willing to ride out volatility, because you can’t ignore China’s economic power," he added.
Michael Lai has managed the Ireland-domiciled $2bn GAM Star China Equity fund since its launch in July 2007.
It is the best-performing portfolio in the IMA China/Greater China sector over five years with returns of 153.91 per cent, beating its MSCI China index benchmark by more than 130 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The GAM fund also boasts top-quartile returns over one and three years, but has tended to be more volatile than the average fund in the sector.
Lai primarily invests in mainland China, although he also accesses the market via Hong Kong-listed companies. His largest sector weightings are in financials and information technology stocks, making up a combined 52 per cent of the portfolio.
GAM Star China Equity has a total expense ratio (TER) of 1.58 per cent and requires a minimum investment of between $5,000 and $10,000.
