There are plenty of investment opportunities and different ways to manage a strategy when it comes to emerging markets.
Yet strategies focused on the world’s developing economies are lumped together in one sector – IA Global Emerging Markets – despite encompassing many different approaches.
One thing they often have in common is the use of the MSCI Emerging Markets index as a benchmark. Another thing is that they frequently underperform this index.
As the below chart shows, in seven of the past 10 years the MSCI Emerging Markets index has outperformed the average IA Global Emerging Markets fund.
Performance of sector vs index over 10yrs
Source: FE Analytics
“I would say that it’s hard for global emerging markets funds to outperform consistently, owing to the variation of returns at a geographical level,” said Rob Morgan (pictured), pensions & investments analyst at wealth manager Charles Stanley. 
“For instance, if a fund is structurally underweight or overweight China, that can have a greater impact on short-term performance than individual stock selection. Thus, it’s difficult for a fund to outperform its benchmark over consecutive discrete years.
“Countries that make up the index are wide-ranging – China, India, Australia, ASEAN – and diverge from one another quite significantly.”
Over the past three calendar years, just three funds have managed to outperform the index: Artemis Global Emerging Markets, BlackRock Emerging Markets and Vanguard Global Emerging Markets.
Even on a cumulative basis, it is difficult to outperform the index, with more than half of the sector’s funds with a long-enough track record falling behind.
Over the three years to the end of 2019, the MSCI Emerging Markets index has made a total return of 29.55 per cent; the sector, meanwhile, has managed to return just 27.39 per cent.
“I think that the IA Global Emerging Markets sector has a natural bias toward higher growth companies and therefore, while they can excel in good market conditions, they may not be that resilient on the downside,” said Tom Sparke, investment manager at GDIM Discretionary Fund Managers.
“Growth styles tend to be the highest movers in both upward and downward markets. Taking the three-year period – as a whole – high-growth strategies have excelled.
“In a sector that is naturally populated with holdings that contain more volatile assets, for a sterling-based investor the currency also adds to the risk.”
Below, Trustnet takes a closer look at the funds that have managed to outperform the MSCI Emerging Markets index.
Performance of funds vs benchmark 2016-2019
Source: FE Analytics
First up is the £360.4m Artemis Global Emerging Markets fund, managed by Peter Saacke and Raheel Altaf. Of the three funds, it has a longer period of outperformance, having also beaten the index in 2016.
The fund, launched in 2015, has made a total return of 32.59 per cent over the past three years to the last year-end. 
“The Artemis fund is run using their team’s SmartGARP approach, which often leads to a portfolio with a significantly lower valuation than the average,” said GDIM’s Sparke (pictured).
“The fund typically has a high level of active share, showing its lack of benchmark awareness, and holds a bias towards mid-caps at present.”
The proprietary SmartGARP process tool rates every stock in the universe on seven factors – growth, value, earnings revisions, momentum, accruals, investor sentiment and macroeconomic forecasts. This is combined with a quantitative process involving the fund managers.
Next up is the BlackRock Emerging Markets fund, a £354.5m strategy with five FE fundinfo Crowns. It has been managed by Alpha Manager Gordon Fraser and Andrew Swan since 2017.
It is the only fund of the three that is in positive territory so far this year, with a return of 2.85 per cent during the first month of 2020.
The fund is also one of the top performers in the sector with a 50.59 per cent total return over the past three years to the end of 2019.
“A winning formula over the past three years will have been exposure to the tech sector, especially the Chinese internet names which have been strong performers,” said Charles Stanley’s Morgan.
“The BlackRock fund in particular has had decent exposure, and it would be difficult for a fund to outperform with a low weighting to this sector given its importance to returns.”
Performance of funds over 3yrs to end-2019
Source: FE Analytics
Finally, Vanguard Global Emerging Markets is another five Crown-rated fund that has outperformed the MSCI Emerging Markets index in each of the past three calendar years.
The £137.9m fund, which targets long-term capital growth, has made a total return of 39.36 per cent over the past three years (to the end of 2019). It is jointly managed by three different groups: Baillie Gifford, Oaktree Capital Management and Pzena Investment Management.
“Vanguard Global Emerging Markets uses a deliberately diverse mix of active managers – including Baillie Gifford, known for growth; Oaktree, who have a value-based approach; and Pzena, who believe in a deep value approach – which has served them well in a number of tough market environments in recent years,” said Sparke.
Each management group manages approximately equal portions of the fund, which currently counts around 157 stocks with an average market capitalisation of £29.3bn. It includes names such as Tencent, Alibaba, Samsung and Sberbank.