Most of the funds within the IA Global Emerging Markets sector have failed to beat the 10-year total return of the market, despite the asset class being seen as an area where active management can have an advantage over index trackers.
Over the past 10 years, the average member of the IA Global Emerging Markets sector has posted a 65.77 per cent total return and, as the chart below shows, has underperformed the MSCI Emerging Markets index by close to 14 percentage points.
The journey that the average fund has given investors has also been less than spectacular as, even though the IA Global Emerging Markets sector has slightly lower annualised volatility and maximum drawdown numbers than the index, its risk-adjusted returns as measured by the Sharpe ratio have been significantly lower.
Performance of sector vs index over 10yrs
Source: FE Analytics
This pattern also holds true over shorter time frames, with FE Analytics showing that the average IA Global Emerging Markets fund is lagging the MSCI Emerging Markets index over one, three and five years as well.
Emerging markets as an asset class have underperformed the developed world for much of the post-crisis period, as the MSCI World has made more than 155 per cent over the past decade. However, emerging markets are ahead of developed markets for the last 12 months.
With more investors re-allocating to emerging markets – the latest Bank of America Merrill Lynch research showed that a net 27 per cent of fund managers are now overweight this space – FE Trustnet tried to find out how many of the sector’s members have stayed ahead of the market.
Our research shows that just under 40 per cent of the funds in the IA Global Emerging Markets sector have made a higher total return than the index’s 65.77 per cent over the past 10 years. This means only 16 of the 42 funds with a long-enough track record are outperforming.
Aviva Investors Emerging Equity MoM 1, which is a mandate run by T. Rowe Price and is part of the Aviva Investors Manager of Manager range, sits at the top of the performance table after making 175.41 per cent over the 10 years in question.
In the latest update, the managers of the fund argued that emerging markets could still outperform the developed world even as the US continues to lift interest rates. While this is likely to cause volatility, emerging markets’ improved current account positions, higher foreign exchange reserves, higher real interest rates and attractively-valued currencies mean they are well positioned.
Source: FE Analytics
“Overall, the environment will remain complex, but in our view this should provide a good opportunity for active investors to take advantage of valuation anomalies,” they said.
“The emerging consumer remains a powerful force and we believe it should continue to drive strong growth in a variety of industries and companies, including retail, banking, technology and the Internet. With investors sceptical, valuations attractive, and fundamentals bottoming, we believe the environment appears positive for emerging market equities and ripe for stock picking.”
Another seven funds have posted 10-year returns of 100 per cent or more, including Aberdeen Emerging Markets Equity, Baillie Gifford Emerging Markets Growth and Dimensional Emerging Markets Core Equity as well as some small-cap strategies.
The above table shows all the funds that have beaten the MSCI Emerging Markets index, along with their total returns over shorter time frames. As can be seen, only a handful are currently ahead of the index over all time frames.
Aviva Investors Emerging Equity MoM 1 is one of them while Richard Sneller and Mike Gush’s Baillie Gifford Emerging Markets Growth is the only other fund to make more than 100 per cent as well as being ahead of the index over one, three, five and 10 years.
The five FE Crown-rated fund has the same investment philosophy as Baillie Gifford’s other successful funds, in that it is bottom-up with a significant bias towards growth. This has led to strong outperformance at a time when the growth style of investing has been buoyed by ultra-low monetary policy.
BlackRock Emerging Markets, which is managed by Gordon Fraser and Andrew Swan, is notable in that it is currently not only ahead of the index over one, three, five and 10 years but over one, three and six months as well.
The £175.1m fund is overweight small-caps, which will have contributed to its long-term outperformance, and has more than the index in sectors such as financials and materials. It is underweight some areas that have already had a strong run such as information technology and consumer staples.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The other funds that are beating the MSCI Emerging Markets index over one, three, five and 10 years are GS Emerging Markets Equity Portfolio, Schroder Global Emerging Markets and Barings Global Emerging Markets.
However, there are also 11 IA Global Emerging Markets funds that have underperformed the index over all four of these time frames.
Legg Mason QS Emerging Markets Equity is at the bottom of the list after making just 13.86 per cent over the past 10 years and it is joined at the bottom of the performance table by the likes of Janus Henderson Emerging Markets Opportunities, AXA Framlington Emerging Markets and Threadneedle Global Emerging Market Equity.