This stellar performance has prompted a number of fund groups to launch products focusing on this sector in recent years, and interest from private investors and advisers has duly followed.
Performance of indices since 2000
Source: FE Analytics
Sod’s law is a terrible thing: just as investors were beginning to become comfortable with the idea of emerging markets, the asset class then begun to underperform. According to FE Analytics, the MSCI EM index has made a slight loss over a three-year period, compared with positive returns of 29.02 per cent from the global index.
Performance of indices since 2000
Source: FE Analytics
There are a number of reasons for this poor run – expensive valuations, the economic slowdown in China, and a stronger US dollar to name but a few.
However, the general consensus is that the long-term case for emerging markets remains very much intact, and many experts argue that the recent falls have presented investors with a compelling buying opportunity, as long as they have the stomach for further volatility.
With this in mind, we highlight three emerging markets funds that are rated highly across all of FE’s ratings – at least one of them may be of interest to investors looking to snap up a bargain this autumn.
First State Asia Pacific Leaders
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FE Crowns: 5
- FE Alpha Manager: 2
- FE AFI: Cautious, Balanced and Aggressive
- FE Group Awards: Outstanding
There is usually little to separate the two, but in the latest rebalancing of the FE Group Awards, First State pipped its rival to the post, achieving the only "Outstanding" rating in the emerging markets category.
One of its flagship products is the £7.6bn First State Asia Pacific Leaders fund, which scores full marks across all of FE’s ratings. It is headed up by two FE Alpha Managers – Angus Tulloch and Alistair Thompson – has five FE Crowns, and is included in all of the FE AFI’s recommended portfolios.
One look at its performance record and it is easy to see why: FE data shows that First State Asia Pacific Leaders is the second-best performing fund in its IMA Asia Pacific ex Japan sector since its launch in December 2003, with returns of 314.71 per cent. The only fund that has returned more is the very similar First State Asia Pacific portfolio, which is closed to new money.
Performance of fund vs sector and index since launch
Source: FE Analytics
As well as boasting a strong performance record, the fund has been significantly less volatile than its sector and benchmark, performing much better in falling markets. In 2008, for example, First State Asia Pacific Leaders lost only 16.21 per cent, compared with 45.09 per cent from the MSCI AC Asia Pacific ex Japan index.
This is no coincidence: Tulloch and Thompson target companies with strong balance sheets and predictable earnings, which tend to do much better during market sell-offs. This bias does mean that the fund tends to fall behind in strong rising markets, as was the case in 2009.
"The managers’ ability to protect capital is rated as one of their greatest attributes and has led to the portfolio rightly gaining a reputation as one of the most stable in the Asia Pacific market," said the FE Research team, which includes the fund in the FE Select 100.
The teams adds that First State Asia Pacific Leaders represents a good choice for cautious investors willing to dip their toe back into emerging markets, but points out that Tulloch and Thompson have the flexibility to become more aggressive if they see fit, in spite of the size of the fund.
The managers are currently significantly underweight China, preferring to get access to the consumer growth story in this nation through Hong Kong companies, which tend to score better in corporate governance surveys.
India, which has underperformed significantly of late, is one of their biggest overweights.
First State Asia Pacific Leaders requires a minimum investment of £1,000 and has ongoing charges of 1.55 per cent.
Those with a keen eye may notice that First State Asia Pacific has slipped behind its sector and benchmark over the last year – unusual given that the fund tends to cope very well in volatile periods. FE Trustnet will look into why this is happened in an article next week.
Newton Asian Income
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FE Crowns: 5
- FE Alpha Manager: No
- FE AFI: Cautious, Balanced and Aggressive
- FE Group Awards: Not rated
Jason Pidcock’s Newton Asian Income fund has been one of the best-selling portfolios of recent years, sending assets under management (AUM) to £4.1bn.
Much of this was a result of the fund’s very strong risk-adjusted return record. As well as consistently beating its sector and benchmark since its launch in November 2005, it has also been less volatile, and protected more effectively against the downside.
Performance of fund, sector and index
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) |
|---|---|---|---|
| Newton - Asian Income | 10.34 | 40.28 | 176.61 |
| FTSE Asia Pacific ex Japan index | 12.59 | 15.14 | 81.88 |
| IMA Asia Pacific ex Japan | 8.68 | 8.67 | 107.5 |
Source: FE Analytics
The fund is currently yielding 4.78 per cent – a top-decile figure for the IMA Asia Pacific ex Japan sector.
Pidcock’s emphasis on income has aided the fund in tough times, not only because dividends tend to smooth out returns during market falls, but also because the companies he invests in tend to be economically insensitive, above average in terms of quality and balance sheet strength.
He has hefty exposure to Australia – one of the most developed income markets in Asia – which has contributed to its lower volatility.
Like the First State fund mentioned earlier, the FE Research team sees Newton Asian Income as a relatively cautious option for emerging market investors, but says it has plenty of potential to outperform over the long-term.
"The way the fund sailed through the turbulence of 2011, massively outperforming both its sector and benchmark, suggests it will still do well if markets face further trouble in the future," the team said.
Newton Asian Income is included in all three of FE's AFI portfolios, is a constituent of the FE Select 100, and has five FE Crowns.
It requires a minimum investment of £1,000 and has ongoing charges of 1.65 per cent.
First State Global Emerging Markets Leaders
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FE Crowns: 5
- FE Alpha Manager: No
- FE AFI: Cautious, Balanced and Aggressive
- FE Group Awards: Outstanding
Just two made it into the FE Select 100, only one of which scores highly across the majority of FE’s various ratings: First State Global Emerging Markets Leaders.
Managed by Jonathan Asante and Tom Prew, this is arguably the most consistent fund in the sector over the last decade, achieving top-quartile returns over one, three and five years, and since its launch in late 2003.
Performance of fund, sector and index
| Name | 1yr | 3yr | 5yr |
|---|---|---|---|
| First State - Global Emerging Markets Leaders | 6.68 | 23.59 | 141.83 |
| MSCI EM (Emerging Markets) | 7.55 | 8.62 | 79.82 |
| IMA Global Emerging Markets | 2.71 | -3.54 | 86.46 |
Source: FE Analytics
Like its Asian counterpart, the £4.2bn vehicle has achieved this outperformance with significantly less volatility and downside risk, owing to the fact that it uses exactly the same process when it comes to picking stocks.
However, unlike First State Asia Pacific Leaders, it has coped with the recent turbulence in markets very effectively.
Like Tulloch and Thompson, the managers are underweight China and overweight India. South Africa is currently their biggest position, at 14.2 per cent.
First State Global Emerging Market Leaders has five FE Crowns and is highly rated by the FE AFI panel of leading experts, though neither Asante nor Prew are FE Alpha Managers.
It requires a minimum investment of £1,000 and has ongoing charges of 1.58 per cent. Unfortunately, First State soft-closed the fund last month amid mass inflows; however, it is still available if investors are willing to stomach an initial 4 per cent charge.
Asante was recently quoted as saying that the fund may begin to invest in companies listed in developed markets, with indirect exposure to the likes of China and Brazil. The UK already has a 9 per cent weighting in the fund, for example. This move could see First State Global Emerging Markets Leaders move into the IMA Global sector in the foreseeable future.
Fund and manager ratings are everywhere, but how much emphasis do you place on them when constructing a portfolio? Do you have a favourite, reliable rating you go to again and again, or are they all equally important?
With so many ratings around, we would like your views on which ones you value the most. Please click here to complete a short survey on the subject.
