Aberdeen and First State take in the lion’s share of money from both retail and institutional investors looking for exposure to fast-growing regions such as China, India and South America.
For example, of the £50bn invested in IMA Global Emerging Markets, more than half is held in five vehicles run by the two firms.
One look at the performance tables and it is easy to see why.
A fund run by either Aberdeen or First State tops the IMA Global Emerging Markets and IMA Asia Pacific ex Japan sector over one, three, five and 10 years.
Over three and five years, four of the five best-performing emerging markets funds are run by one of the two firms.
Top-five emerging markets funds over 5yrs
| Name | 5yr (%) |
|---|---|
| Aberdeen Global - Emerging Markets Smaller Companies | 158.93 |
| McInroy & Wood - Emerging Markets | 106.15 |
| Aberdeen Global - Emerging Markets Equity | 104.89 |
| Aberdeen - Emerging Markets | 103.57 |
| First State - Global Emerging Markets | 101.54 |
Source: FE Analytics
They are equally dominant in the closed-ended universe, with Scottish Oriental Smaller Companies IT, Edinburgh Dragon and Aberdeen New Thai IT all standout performers.
However, eye-watering inflows have inevitably led to concerns over capacity and liquidity, which has resulted in a number of soft-closures in recent years.
The likes of First State Asia Pacific, First State Latin America and Aberdeen Emerging Markets all have significant barriers to entry these days and are thus effectively closed to new money.
A number of the firms’ other flagship funds are expected to follow suit, with the £7.4bn First State Asia Pacific Leaders portfolio looking particularly vulnerable.
There are still some Aberdeen and First State funds open to new money, but there is a definite void to be filled in certain areas of the market. This has given other fund houses a huge opportunity to take market share.
FE Trustnet asked a group of industry experts to highlight some of the established options in the emerging markets space that are not run by either First State or Aberdeen and remain open to new money. Here is what they said:
Asia Pacific ex Japan
Rob Gleeson and his FE Research team highlight Schroder Asian Alpha Plus as a worthy alternative to the Aberdeen and First State funds.
"The fund benefits from the established analyst team settled in the Asia Pacific, which provides easy access to companies’ managers thanks to Schroders’ strong reputation," explained FE Research analyst Amandine Thierree.
"This fund has the ability to diversify a portfolio and would sit well in a core/satellite strategy."
She points out that Schroder Asian Alpha Plus is highly concentrated and as a result could be susceptible to sharp falls during falling markets.
However, she adds that it is a very good long-term option for anyone who can stomach the volatility.
"Dobbs is optimistic about the growth of Asian markets, despite the tough environment caused by the situation in Europe," she said.
"In 2012, he added companies that are more economically sensitive in a bid to boost performance."
"However, the fund holds fewer companies than its benchmark that offer more predictable and stable earnings, which may penalise it if markets fall again."
Matthew Dobbs’ £486m fund has returned 77.16 per cent since its launch in November 2007, more than doubling the returns of its sector average and benchmark. It has been more volatile, though.
Performance of fund vs sector and index since launch
Source: FE Analytics
Only five funds in the sector have returned more – two of which are run by First State and one by Aberdeen.
Schroder Asian Alpha Plus is also a top-quartile performer over three and five years.
It has recently been added to the FE Select 100 – an elite list of funds chosen by the FE Research team.
It requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.7 per cent.
Tim Cockerill (pictured), head of collectives research at Rowan Dartington, is a big fan of the Newton Asian Income fund, but says it is not an out-and-out emerging markets play.
"The manager [Jason Pidcock] has done a very good job, but I almost wouldn’t class it as an emerging markets fund because it looks at the more mature end of the scale and has a lot in Australasia as well," he said.
"The Asian income story stacks up quite well, and the manager has got a good balance of capital growth and income growth so far."
The FE Research team are also big fans of the fund, and point to it as a good play for those who want to keep volatility to a minimum.
"The way the fund sailed through the turbulence of 2011, massively outperforming both its sector and benchmark, suggests it will still do well if markets face further trouble in the future," the team said.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Newton Asian Income requires a minimum investment of £1,000 and has an OCF of 1.65 per cent. Pidcock is an FE Alpha Manager and the fund has five FE Crowns.
FE Trustnet recently looked at an alternative to Newton Asian Income, for those who are concerned about the size of the £3.4bn portfolio.
Global emerging markets
Cockerill thinks investors should consider closed-ended vehicles for emerging markets exposure, given the lack of proven options in the IMA Global Emerging Markets sector.
"The underlying managers in investment trusts are very good and you don’t have to worry about fund sizes because they’re closed-ended," he said.
"You also have the added bonus of discounts, in that if the market falls, you can get exposure to a very good manager at a cut-price of 10 to 15 per cent."
Cockerill says he is a big fan of Dr Mark Mobius’ Templeton Emerging Markets IT.
"With Mobius still at the helm, this is definitely a contender," he said. "It has all the things you want from an emerging markets portfolio – experience, resources, a big team and very good access to the emerging world."
"It’s a big trust as well, which means it’s very liquid," he added.
The Templeton Emerging Markets trust has a stellar long-term record, as shown by FE data. It is up 621.79 per cent over 10 years, beating its MSCI EM benchmark by more than 240 percentage points.
It has also significantly beaten the index over three and five years, albeit with more volatility. The £2.3bn trust has an OCF of 1.31 per cent and is currently trading on a discount of 8.1 per cent.
"[In the open-ended universe], I do think M&G Global Emerging Markets is interesting," Cockerill added.
"It’s not the first thing you think of when you talk about M&G, but they’re doing a very good job."
Matthew Vaight’s four crown-rated M&G Global Emerging Markets fund has returned 133.48 per cent since its launch in February 2009, compared with 99.09 per cent from the IMA Global Emerging Markets sector average and 103.49 per cent from the fund’s MSCI Emerging Markets benchmark.
With the exception of portfolios run by First State and Aberdeen, only Templeton Emerging Markets Smaller Companies, JPM Emerging Markets Small Cap and McInroy & Wood Emerging Markets have returned more over this time.
M&G Global Emerging Markets requires a minimum investment of £1,000 and has an OCF of £500. It has £1bn in assets under management (AUM).
"We also like BlackRock Frontiers IT and the Eastern European Trust," Cockerill added.
Country-specific emerging markets
The likes of First State Greater China Growth and First State Indian Subcontinent are all closed to new money.
Cockerill says investors may be better off looking to investment trusts again and highlights the JPM Brazil IT as one Rowan Dartington currently rates.
FE Research analyst Charles Younes thinks Jupiter India is a very good option in the open-ended universe.
He says he likes manager Avinash Vazirani’s high-conviction, bottom-up approach, and says few of his rivals have the same level of expertise in Indian companies.
"Since the fund’s inception, Vazirani has identified the growth of the middle class in India as a major investment theme and runs in-depth analysis of companies to ensure the fund will profit from this trend," said Younes.
"Vazirani recognises company success is highly dependent on those in executive positions and is very particular in his stock selection."
"India remains a niche market but as industrialisation and urbanisation continue, the interest from investors will grow."
"Vazirani is regarded as one of the most successful and knowledgeable fund managers in this area," he added.
The four crown-rated fund has returned 32.58 per cent since its launch in February 2008, beating its benchmark by 24.1 percentage points.
Only First State Indian Subcontinent and Aberdeen Global Indian Equity have returned more.
Performance of fund vs index since launch
Source: FE Analytics
Jupiter India requires a minimum investment of £1,000 and has an OCF of 1.88 per cent.
It focuses on Indian companies of all sizes, and can also invest a maximum of 10 per cent in firms listed on the stock exchanges of other countries in the Indian subcontinent.