Baillie Gifford Emerging Markets Leading Companies, BNY Mellon Emerging Markets Corporate Debt, Old Mutual Emerging Markets Debt and Pimco GIS Emerging Markets Corporate Bond are the best truly active funds for investors looking to take exposure to the emerging markets, according to data from FE Analytics.
In this latest study, all calculations are in sterling and have been done over a three-year period (the average holding time of a fund) to the end of August 2018.
We took all 164 funds across the IA Global Emerging Markets and IA Global Emerging Markets Bond sectors and first removed those that don’t have an assigned benchmark.
We then filtered those that have an R-squared ratio – which measures how closely correlated a fund is to a benchmark – of between 0.5-0.85 as funds that have a ratio of 0.5 or less are too uncorrelated to their benchmark to make for a useful comparison, while those that are above 0.85 are too closely correlated and behave like ‘closet trackers’.
Then, to find the best active funds we filtered the remaining funds for alpha (overperformance of the benchmark), Jensen’s alpha (superior stock picking from the manager) and excess returns (shows a manager is adding value to a fund).
Finally, we filtered those that had an information ratio of 0.5 or above, which means the manager has used skill and knowledge to enhance the fund returns.
We were left with just four funds: Baillie Gifford Emerging Markets Leading Companies, BNY Mellon Emerging Markets Corporate Debt, Old Mutual Emerging Markets Debt and Pimco GIS Emerging Markets Corporate Bond.
First up is the only equity fund that made it onto the list: Baillie Gifford Emerging Markets Leading Companies.
Best active emerging market funds over 3yrs
Source: FE Analytics
The five FE Crown-rated fund was launched in 2005 and has been managed by Will Sutcliffe since 2010, who took over from Richard Sneller.
It invests in large-cap, liquid names, with a growth-bias and a typical holding period of five years and draws on the wider emerging markets team at Baillie Gifford.
Over the past three years, the fund has average one-year rolling returns of 19.15 per cent, more than its average peer’s 13.54 per cent.
Meanwhile, the MSCI Emerging Markets index has average rolling returns over the same period of 14.54 per cent.
Overall, in the past three years the fund has returned 82.74 per cent – the third-best in its sector and ahead of the index.
The fund has an overweight in India compared to the benchmark. It invests over 15 per cent in the country, while India constitutes slightly more than 9 per cent of the MSCI Emerging Markets index.
Other overweights include Brazil, where 8.6 per cent of the fund is invested, while it is neutral on the index’s largest constituents: China, South Korea and Taiwan.
Baillie Gifford Emerging Markets Leading Companies has assets under management (AUM) of £486m and has a clean ongoing charges figure (OCF) of 0.78 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Up next, is the best-performing of the three truly active funds in the IA Global Emerging Markets Bond sector: BNY Mellon Emerging Markets Corporate Debt.
It has been run by FE Alpha Manager Colm McDonagh since its launch in 2012 and holds four FE Crowns.
BNY Mellon Emerging Markets Corporate Debt has average one-year rolling returns over the past three years of 12.06 per cent while the average IA Global Emerging Markets Bond peer has returned an average of 7.11 per cent.
Over the entire period the fund is its sector’s fifth-best performer and is up 38.61 per cent, beating its average peer.
It has only small under- and overweights spread across many countries in the emerging markets region but is heavily underweight financials and consumer while being overweight oil & gas and industrials.
It has a duration of 4.4 years and a yield of 6 per cent with over half of the holdings in investment grade fixed income.
The fund has AUM of £200m and an OCF of 0.79 per cent.
The third of the best active emerging markets funds is Old Mutual Emerging Market Debt, which launched in 2003 but has been run by Delphine Arrighi since 2016, who originally joined as co-manager alongside John Peta before taking sole charge of the fund.
Its average rolling returns are 11.22 per cent, 0.04 per cent more than its JPM EMBI Global benchmark.
On a cumulative basis, the last three years have seen the fund gain 36.24 per cent, the seventh-best in the sector and more than the JPM EMBI index (35.42 per cent).
The fund’s largest regional allocations are Egypt, Argentina, Indonesia, Mexico and Ukraine. It yields 6.69 per cent and invests 27.4 per cent in investment grade credit, while the majority is allocated to high yield.
Old Mutual Emerging Market Debt has a fund size of £149m and an OCF of 1.95 per cent.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Finally, Pimco GIS Emerging Markets Corporate Bond is the last fund that made the list.
It launched in 2009 but has been managed by Kofi Bentsi, Mohit Mittal, and Yacov Arnopolin since 2016, with the group taking over from former manager Said Saffari.
It has the lowest average rolling returns of the four funds studied at 10.26 per cent, although this is still more than its average peer’s 7.11 per cent.
Over the past three years, the fund is up 38.83 per cent, which is the second-best in the IA Global Emerging Markets Bond sector.
Its highest allocations go to Brazil, China, Russia, South Africa, and South Korea, while banks, metals & mining and integrated oil are the most-invested sectors.
Pimco GIS Emerging Markets Corporate Bond has a duration of 3.98 years and a yield-to-maturity of 7.54 per cent, with 55 per cent of the fund is invested in high yield credit, with the rest going to investment grade. It has AUM of £153m and an OCF of 0.95 per cent.