Schroder Global Emerging Markets and the onshore and offshore versions of ASI Emerging Markets Equity are the most consistent IA Global Emerging Markets funds of the past decade, beating the sector’s most common benchmark – the MSCI Emerging Markets index – in seven of the past 10 calendar years.
Most consistent IA Global Emerging Markets funds
Source: FE Analytics
A further 11 funds have managed to beat the index in six of the past 10 calendar years.
In previous years that Trustnet has run this study, we focused on the consistency with which funds managed to beat their sector average.
However, we have now switched the focus to an index to see how much value these funds add over passive strategies.
First up is Schroder Global Emerging Markets, headed up by co-managers Robert Davy and Tom Wilson.
Davy and Wilson believe emerging stock markets are inefficient, which means there is the opportunity to add value through active management. They aim to derive 50 per cent of outperformance from country selection and 50 per cent from stock selection.
The managers said that given the disparity in stages of development across emerging markets, it would be inappropriate to apply a single style bias across the sector.
“However, given our strong analytical resources we would expect to generally have a bias towards medium capitalisation stocks, which should provide extra return potential,” they added. “We believe that as fund managers we should manage both return and risk.
“Our aim is to achieve returns with the minimum level of risk through a proactive approach to risk control. We believe that applying a systematic, disciplined approach, with a strong team culture, increases our ability to add value.”
Schroder Global Emerging Markets has made 88.22 per cent over the decade in question, compared with gains of 74.93 per cent from the benchmark and 67.78 per cent from its sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is £850m in size and has ongoing charges of 0.95 per cent.
The fund has beaten the sector average in eight of the past 10 calendar years, which gives it the edge over ASI Emerging Markets Equity and Aberdeen Standard SICAV I Emerging Markets Equity, which have managed this feat in seven.
ASI Emerging Markets Equity is focused on finding high-quality companies at attractive valuations that can be held for the long term.
It uses the MSCI Emerging Markets index as a reference point for portfolio construction and as a basis for setting risk constraints. The expected variation (tracking error) between the returns of the fund and the index is not expected to exceed 9 per cent.
The team will not invest in business models it does not fully understand and as a result it does not hold tech stocks Alibaba or Baidu, a stance that has harmed relative performance in the past. However, its avoidance of Baidu helped it outperform the index last year when the stock tanked.
In a recent note to investors, the managers noted the emerging market asset class remains attractively priced relative to both its historical average and developed peers.
“The large and growing middle classes in these emerging markets will propel demand for consumer and financial services, infrastructure and new technologies, where the portfolio is well positioned,” the managers noted.
“Beyond the near-term volatility, our commitment to focus on quality companies with healthy fundamentals and experienced management should yield sustainable returns for investors in the longer term.”
Data from FE Analytics shows that ASI Emerging Markets Equity and Aberdeen Standard SICAV I Emerging Markets Equity made 96.64 per cent and 89.85 per cent over the decade in question, respectively.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
The £1.1bn ASI Emerging Markets Equity fund has ongoing charges of 1.21 per cent, while Aberdeen Standard SICAV I Emerging Markets Equity is $2.3bn in size and has ongoing charges of 1.29 per cent.
Aside from Schroder Global Emerging Markets, three other funds outperformed the sector in eight of the past 10 years – although they only beat the MSCI Emerging Markets index in six. These are MI Somerset Global Emerging Markets, BlackRock Emerging Markets and GS Emerging Markets CORE Equity Portfolio.
Edward Robertson, manager of Somerset Global Emerging Markets, seeks companies that can earn sustainable returns on capital over the course of a business cycle and that are run for the benefit of minority shareholders.
A core element of the portfolio is made up of companies with sustainable earnings, high levels of free cash-flow generation, healthy balance sheets and good corporate governance.
The team at Square Mile Investment Consulting & Research said this fund “offers access to a seasoned portfolio manager who is supported by a well-equipped investment team using a well thought-through process”.
It made 91.41 per cent over the period in question. The £334m fund has ongoing charges of 0.92 per cent.
BlackRock Emerging Markets combines top-down macro views with in-depth fundamental research. Manager Gordon Fraser said that investors in this sector should embrace volatility rather than fear it, as it offers the opportunity to make excess returns.
“I believe emerging markets follow quite a standardised macroeconomic cycle and you can make money out of that by buying into countries when they are early-cycle and selling when there are late-cycle properties. And doing that over and over again,” he said.
The manager has a bottom-up process, but said it would mean nothing without an understanding of the macroeconomic environment.
“You want to align your stock selection with your macro view because if you get the macro cycle wrong, it doesn’t really matter whether you’ve got a good or bad bottom-up process,” he added.
BlackRock Emerging Markets made 100.51 per cent over the 10-year period. The £322m fund has ongoing charges of 1.01 per cent.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
The GS Emerging Markets CORE Equity Portfolio makes use of ‘Big Data’ with a human overlay – it starts by ranking every stock in its investable universe on alpha scores, then selects the highest-ranked stocks, balanced against a variety of risk factors such as sector exposure.
The $3bn fund has ongoing charges of 0.82 per cent. It made 96.16 per cent over the period in question.