Various macroeconomic concerns such as slowing growth in China and tapering of QE in the US saw emerging market equities lose money in 2013, and fall well short of the US and Europe in 2011 and 2012 as well.
However, this trend has reversed in 2014.
While there was volatility in the first few weeks of the year, the IMA Global Emerging Markets sector has returned 12.8 per cent since the market bottomed on 27 January – far more than the IMA’s various developed market sectors.
Performance of sectors since Jan 27 2014
Source: FE Analytics
Our data shows that every fund in the sector has returned at least 5 per cent over that time.
The valuation gap between developed and emerging market equities is commonly viewed as the main driving force behind the rally, as FE Trustnet highlighted recently.
One fund which has taken full advantage of the change in sentiment has been James Donald’s £772m Lazard Emerging Markets fund.
According to FE Analytics, it has been the best performing portfolio in the sector since 27 January with returns of 18.24 per cent.
Only one fund in the entire IMA universe – Aberdeen Latin American Equity – has returned more over the period. It sits in the Specialist sector.
Donald’s fund has good long-term track record as well, delivering top quartile returns over one, three, five and 10 year periods.
He currently counts popular large-cap stocks like Taiwan Semiconducter, Samsung and Banco de Brazil as top-10 holdings.
In an article later today, Donald talks to FE Trustnet about his current positioning and why he expects the rally in emerging market equities to continue into the second half of 2014.
Matthew Vaight’s £1.4bn M&G Global Emerging Markets fund, which also offers core exposure to the developing world, has been a top decile performer since the market bottomed with returns of 17.52 per cent.
The fund has been top quartile since its launch in February 2009 and has beaten the sector and its benchmark – the MSCI Emerging Markets index – over one, three and five years.
It hasn’t just been large-cap funds which have spiked, though.
Xavier Hovasse and David Young Park’s $206m Carmignac Emerging Discovery fund, which has a clear mid and small-cap bias, has been the second best performing fund in the sector since the market bottomed with returns of 18.36 per cent.
Hovasse and Young Park’s four crown-rated fund was launched in December 2010.
While it was third quartile in 2011 with losses of 21 per cent, it outperformed the sector in 2012 and 2013.
JPM Emerging Markets Small Cap, which has a similar mandate to the Carmignac fund, has been the third best performing portfolio in the sector since 27 January.
It has returned 17.9 per cent over the period, beating its MSCI Emerging Markets Small Cap benchmark by around 5 percentage points.
Performance of fund vs sector and index since Jan 2014
Source: FE Analytics
The $541m Luxembourg-domiciled SICAV, which was launched in November 2011, has been one of the most consistent emerging market funds over recent years.
Though it was bottom quartile in the falling markets of 2008 and 2011 – when it lost 49 per cent and 26 per cent, respectively – it delivered top quartile returns 2009, 2010, 2012 and 2013.
The fund is managed by Amit Mehta and is currently overweight India, which will have helped its outperformance recently as the region has surged since Narendra Modi was elected as Prime Minister earlier this year.
While not top decile, the well-known Aberdeen Emerging Markets Equity fund has also rebounded strongly since January.
The £2.3bn fund has been a firm favourite with both private and professional investors due to its team’s focus on quality, cash generative businesses and its stellar track record.
Our data shows that it has been the second best performing portfolio in the sector over 10 years.
However, 2013 was particularly poor year as the fund was a bottom decile performer with losses of close to 10 per cent.
Performance of fund vs sector and index in 2013
Source: FE Analytics
Devan Kaloo, head of emerging markets at Aberdeen, told FE Trustnet last year that the strengthening of the US dollar, as well as regional and stock-specific issues, were the major drivers of the underperformance.
While Kaloo was hopeful that the fund would start to get back on track, many investors seemingly lost their patience with the fund, leading to £440m worth of outflows over the last six months.
However, the fund has been a top quartile performer and has beaten its benchmark since the market bottomed with returns of 15.61 per cent.
The $2.2bn Aberdeen Global Emerging Markets Smaller Companies fund, which didn’t fall as a far as its large-cap rival last year, has also been top quartile since 27 January.
Emerging market equity income funds have proven increasingly popular with investors in recent years.
They are seen as a safer way to gain access to the developing world, and indeed many protected more effectively on the downside between 2011 and 2013.
Hermes’ Jonathan Pines warned FE Trustnet earlier this year that a bubble was developing in defensive dividend-paying emerging market stocks as investors had been overpaying for that safety.
He said he expected income funds to underperform over the next couple of years as a result.
His concerns appear to be playing out, with income-focused funds dominating the list of bottom quartile performers since the end of January.
Source: FE Analytics
The list includes the likes of Standard Life Global Emerging Markets, Newton Emerging Income, Charlemagne Emerging Markets Dividend and Somerset Emerging Markets Dividend Growth.
JPM Emerging Markets Income, UBS Emerging Markets Equity Income and Polar Capital Emerging Markets Income have been second quartile performers over that time, but have all fallen short of the MSCI Emerging Markets index.
Simon Evan-Cook, senior investment manager at Premier, has become more positive on emerging markets this year. However, while he says they may have bottomed on a relative basis, they may not be protected from a global equity market sell-off.
“I think we may have seen the bottom of relative performance, but If the US market were to sell-off significantly, I don’t think emerging markets would be able to escaped unscathed, ” Evan-Cook said.
“However, a lot of the hot money has already come out of the asset class.”
