Smith says that the near-term outlook for the sector is dubious, but that cheap valuations are a boon for the long-term investor such as himself.
“The sector has issues and China is clearly the big driver of the case for emerging markets, so it’s a market that there are concerns about. But I think in terms of under-ownership, sentiment seems to be over-done on valuation grounds and from a technical perspective,” he said.
“It’s probably going to be volatile, therefore one for the brave and the long-term investor.”
“Emerging markets look quite interesting on valuation grounds and there are a couple of interesting ways to play this,” he added.
“One is through Utilico Emerging Markets – the discount has widened out on that one.”
“It has probably been hit more than its peers due to the type of companies it holds and being more infrastructure-based.”
The £372m Utilico Emerging Markets Trust, which has five FE Crowns, concentrates on utilities and infrastructure companies in the developing world.
It has 21 per cent in ports, 15.9 per cent in gas and 14.8 per cent in water and waste stocks.
Its largest single investment is in Malaysia Airport Holdings Berhad, worth 9.1 per cent of AUM.
The fund has been one of the best-performing emerging markets trusts over the past five years, returning 117.51 per cent against an average of 85.81 per cent, helped by the defensive nature of its holdings.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Over the past year it has lost 1.65 per cent but the sector is down 8.68 per cent.
Over three years it is up 23.77 per cent while the average fund has lost 3.79 per cent.
Smith points out that the fund is now trading on a discount of 7.6 per cent, which is cheap relative to recent history.
It has traded at that level on a number of occasions in recent years, however.
Price and NAV of trust over 3yrs
Source: FE Analytics
The fund also pays a dividend of 3.5 per cent, a bonus for investors who expect volatility in the markets in the short-term.
“Sentiment in emerging markets seems to be very weak, so for contrarian investors they look interesting.”
The fund has ongoing charges of just 0.85 per cent prior to the application of a performance fee, but this ballooned to 3.31 per cent in the year to March 2013.
The second fund that Smith is looking at, and one he has already put in his personal portfolio, is James Donald's £568m Lazard Emerging Markets fund.
The fund is institutional, but available through certain platforms.
Data from FE Analytics shows the fund has an excellent long-term track record, having produced top quartile returns of 228.89 per cent over 10 years.
The MSCI Emerging Markets index gained 197.56 per cent over the same time.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
“It’s done a pretty good job of outperforming in decent market conditions and in down markets,” Smith said.
Data from FE Analytics shows that the fund lost less than the sector and benchmark in 2011 and 2013, the two most recent down years, and outperformed in 2010 and 2012.
The fund has 44.6 per cent in emerging Asia and 176 per cent in Latin America, with a further 16.4 per cent in European emerging markets.
Only seven funds have more in the latter region, according to data from FE Analytics.
Financials, IT and telecoms are the three biggest sector bets.
The fund has a yield of 2.1 per cent and ongoing charges are just 1.11 per cent.
Only one fund holds Utilico Emerging Markets in its top 10: Smith & Williamson MM Global Investment.
Premier Liberation VIII and Premier Worldwide Growth hold the Lazard fund in their top 10.
Unicorn’s Peter Walls told FE Trustnet earlier this week that he was finally buying back into the sector for the first time since 2010.
Walls is using Templeton Emerging Markets for general regional exposure as well as a number of Asia Pacific trusts.
