Strategies from Baillie Gifford, Candriam, Newton and Mirabaud have demonstrated less sensitivity to the top-performing MSCI Emerging Market index but with the best stockpicking ability, according to data from FE Analytics.
The MSCI Emerging Markets index has been the best performing market during 2017 outpacing the developed markets with strong double-digit gains.
In the first 10 months of the year, the index rose by 23.07 per cent (in sterling terms), compared with a 8.53 per cent gain for the FTSE 100 and a 8.25 per cent increase for the S&P 500.
Performance from funds in the IA Global Emerging Markets sector has also been strong, with data from FE Analytics revealing that around half of the funds have outperformed the benchmark.
However, the performance of the index has not been as broad-based as some might think given the size of the investable universe.
Woojin Choi, a member of Orbis Investment Management’s emerging markets team, said much of the outperformance of the index this year could be attributed to a handful of ‘mega caps’.
He said: “It has been difficult to generate outperformance without being overweight these stocks: in the first nine months of this year only 40 per cent of all emerging market shares outperformed, the lowest proportion since 2005.”
Source: Orbis Investment Management
Choi said one reason behind the outperformance of emerging market mega caps may be due to the surge of flows to the sector from global investors, who have sought out higher returns by buying the largest and most liquid companies.
Indeed, it is difficult to ignore the influence of the five mega-cap stocks - Alibaba, Naspers, Samsung Electronics, Taiwan Semiconductor Company and Tencent - on performance of emerging market funds.
As such, FE Trustnet considered the funds that have outperformed the index during 2017 with less correlation and a higher degree of manager skill. For the purposes of this study we have not included index-tracking funds.
To identify the funds that have delivered performance with the least reference to the index, FE Trustnet looked at the funds with a bottom quartile r-squared score (which shows a fund’s correlation to the benchmark) and a top quartile Information Ratio (a measure of a fund’s over- or underperformance in comparison to the benchmark).
Below, FE Trustnet considers several funds that have demonstrated good stockpicking ability with low correlation to the benchmark.
Source: FE Analytics
Newton Global Emerging Markets
The Newton Global Emerging Markets fund emerges at the top of our list based on several metrics.
Not only does it have a top-quartile information ratio and bottom-quartile r-squared figure, it also has a top quartile alpha score (a measure of a fund’s over- or underperformance in comparison to the benchmark).
The £165m five FE Crown-rated fund is managed by Rob Marshall-Lee and has a long-term growth mandate.
“This is a thematic portfolio which has a bias to growth-orientated companies, managed in a high conviction manner,” noted analysts at Rayner Spencer Mills.
“There is a disciplined approach to portfolio construction with stock sizing not only reflecting upside, but also the potential downside in an individual name.”
The fund has an ongoing charges figure (OCF) of 0.95 per cent.
Baillie Gifford Emerging Markets Leading Companies
Another five-crown rated fund, the Baillie Gifford Emerging Markets Leading Companies sticks out for its top performance over the year.
The £515m fund has returned 35.68 per cent during the period under review, meaning it is the second-best performing fund in the sector.
The fund, which has been managed by Will Sutcliffe since 2010, targets long-term gains through an actively managed portfolio of around 40-80 larger, more liquid stocks.
Sutcliffe invests with a five-year perspective, a strong preference for growth and using a bottom-up approach.
The high-conviction fund has an annual turnover of 16 per cent, according to Baillie Gifford, and has an active share of 69 per cent relative to the MSCI Emerging Markets index.
Of the two funds it has a higher information ratio relative to the benchmark of 1.15. However, both have similar r-squared ratios. (An information ratio of 1 is considered outstanding, while the lower an r-squared ratio is the less correlated it is to the benchmark.)
The Baillie Gifford fund has an OCF of 0.79 per cent.
Candriam Equities L Emerging Markets
Of the remainder, the Candriam Equities L Emerging Markets fund has been highlighted for its ultra-low r-squared figure of 0.66, although it has a second-quartile information ratio of 0.99.
The €1.1bn fund is managed by head of emerging markets equity Jan Boudewijns and Mohamed Lamine Saidi and in the period under review, the fund has generated a 31.12 per cent gain.
Performance of fund vs benchmark in 2017
Source: FE Analytics
“In 2017, emerging markets – driven by synchronised global growth recovery, less aggressive central banks, a weak dollar and stable macro environment in China – strongly outperformed, despite commodity-price volatility and geo-political issues,” the managers noted recently.
“The perceived risks from the announced Trump policy direction have also been less threatening.
“Still, as many global investors remain underweight, and based on a positive earnings view, we remain supportive of the asset class, despite the possibility of some profit-taking. We thus continue to focus on quality stocks with a strong and sustainable growth profile, relative to their sector, in a well-balanced portfolio”
It does, however, have a high OCF of 2.12 per cent.
Mirabaud Equities Global Emerging Markets
We have also highlighted the Mirabaud Equities Global Emerging Markets fund for its low correlation to the MSCI Emerging Markets index but also for its high, albeit second quartile, information ratio.
The $64.8m fund is managed by head of the global emerging markets team Daniel Tubbs, Charles Walsh and Neville Shaw.
The managers noted: “Despite continued uncertainty around geopolitics, US foreign and trade policies, the outlook and investment case for global emerging market equities remains positive.
“It still remains one of the cheapest asset classes within global equity markets, despite having had a strong rally year-to-date.”
This fund has an OCF of 1.05 per cent.