All three portfolios have high weightings to consumer staples companies which derive a large proportion of their earnings from the emerging economies.
For instance, the five crown rated CF Lindsell Train UK Equity fund – which is headed up by FE Alpha Manager Nick Train (pictured) – holds a hefty 8.8 per cent in Unilever, the blue-chip consumer products business, and a further 8.6 per cent in Diageo, which is the world’s largest drink company.
The five crown rated Liontrust Special Situations fund counts both of those stocks as top 10 holdings as well. Hugh Yarrow’s also five crown rated Evenlode Income fund has 9.1 per cent in Unilever, 6.5 per cent in Reckitt Benckiser and 6.1 per cent in Diageo.
These stocks, and others like them, were very popular with investors for a number of years following the 2008 crisis as not only have they promised a high and reliable dividend, but they all give exposure to the developing world’s middle class who have a growing level of disposable income.
They have, however, begun to fall out of favour as investors have become increasingly concerned about the outlook for emerging markets and the impact that slowdown will have on those companies’ sales.
A number of UK managers, such as FE Alpha Manager John Warren, have been shorting some of the FTSE’s largest international earners because of that negative sentiment and because of their previously high valuation.
There are signs, however, that negative sentiment towards emerging markets might have bottomed with the MSCI Emerging Markets index and the MSCI AC Asia Pacific ex Japan index both rallying over recent months. Also, the likes of FE Alpha Manager Richard Buxton have been upping their exposure to the UK’s emerging market stocks following recent poor performance.
For instance, the likes of Unilever, Diageo, Reckitt Benckiser, SAB Millier and Standard Chartered were among the worst hit stocks during the emerging market induced sell-off in January and the majority of them have failed to recover since.
Performance of stocks between Jan 2013 and February 2013
Source: FE Analytics
These share price falls have hurt the likes of Train.
According to FE Analytics, his £930m CF Lindsell Train UK Equity fund was the only IMA UK All Companies portfolio to deliver top quartile returns – and to beat the FTSE All Share – in six consecutive discrete calendar years between 2008 and 2013.
However, it is currently underperforming against both the sector and index in 2014.
Performance of fund versus sector and index in 2014
Source: FE Analytics
Train has told FE Trustnet in the past that he has, and will continue to, buy as many shares in Unilever –which derives more than half its earnings from the developing world – as he can during periods of weakness.
The reason he likes the stock is because two billion people use a Unilever products every day and that figure is expected to double over the next 15 years or so.
He says he understands why the stock had fallen out of favour, but describes the negative sentiment as nothing more than “collywobbles” as he says there is little chance that it signals a termination in the emerging market growth story.
Unilever, which owns brands such as Marmite, Persil, Domestos and PG Tips, has actually rebounded since the January lows and has delivered a return of more than 7 per cent in 2014.
Despite the concerns, the company has seen decent sales growth from its emerging market assets so far this year. However, it has also been rocked by currency weakness in the developing world and has been receiving less in sterling terms.
Results reported this morning showed sales growth of 6.6 per cent in the developing world and 3.6 per cent overall, but revenues actually fell 6.3 per cent thanks to currency movements.
Other high-profile UK funds that hold more than 3 per cent in Unilever include Investec UK Special Situations, JOHCM UK Opportunities, Trojan Income and Threadneedle UK Equity Alpha Income.
Reckitt Benckiser, another FTSE 100 consumer goods company, has rebounded since the initial sell-off, despite fears that the emerging market slowdown would hurt its sales.
The company’s brands include Dettol, Durex and Cillit Bang and one of its most high-prolie backers is FE Alpha Manager Mark Barnett, who counts Reckitt Benckiser as a top 10 holding in his Invesco Perpetual High Income and Income funds, both of which are five crown rated.
Diageo, which owns Johnnie Walker, Guinness and Smirnoff and sees 42 per cent of its sales from the emerging economies, has fared much worse, however.
It has fallen foul of the emerging market slowdown, and currency weakness, with the company’s net sales falling 1.3 per cent over the last three months and its share price has tanked as a result. Our data shows that Diageo has lost more than 8 per cent so far this year.
Performance of stock versus index in 2014
Source: FE Analytics
According to FE Analytics, there are 61 funds in the IMA UK All Companies and IMA UK Equity Income sector that count Diageo as a top 10 holding. They include Newton Higher Income and Fidelity UK Select.
Shares in one of Diageo’s rival drinks companies, SAB Miller, have also lost money in 2014.
The company, which owns brands such as Fosters, Miller and Peroni, derives a substantial 85 per cent of its sales from Eastern Europe, Latin America, Africa and Asia.
Unlike Diageo, however, it isn’t a popular holding with UK managers. Our data shows that the only portfolio that counts it as a top 10 holding is Marlborough UK Primary Opportunities.
It holds 3.2 per cent in the stock, but the Marlborough portfolio is a clear example of a fund that would benefit from a pick-up in the developing world. For instance, it holds 2.9 per cent in Standard Chartered – which has huge emerging market presence – plus 5.3 per cent in Rio Tinto and 2.4 per cent in Glencore Xstrata.
It is debatable whether the managers who are buying bombed out commodity stocks, such as Rio Tinto and BHP Billiton, are doing it to play the emerging markets theme or because they are currently very lowly valued.
Their largest clients are leading emerging markets such as China, but a number of managers have been buying them because of management changes within the sector. Nevertheless, 52 UK funds count BHP as a top 10 holding while 143 hold Rio Tinto in their top 10.
Elite Charteris Premium Income is an example of a fund that would certainly benefit from an improving in the emerging markets and the commodities sector.
It has 28.7 per cent of its assets spread across Glencore, BHP, Rio Tinto, Fresnillo and Diageo. Unsurprisingly however, given that positioning, it has been a bottom decile performer so far this year.