In the UK a huge number of funds are dominated by well-known blue-chips like GlaxoSmithKline, Vodafone and BP, largely because these companies are established income paying firms with dominant roles in their industries.
The same is the case in emerging economies, where the same old companies crop up in portfolios – again, particularly companies with an income focus which are bought by funds looking to prop up their yield.
There has been a surge in dividend-paying emerging market funds in recent years, but the income culture in this area is still in its early stages.
Even the largest companies are subject to corporate governance issues in spite of their massive size, which could impact a whole host of funds operating in the sector if there’s a BP-style disaster.
With this in mind, FE Trustnet highlights three highly sought after companies that dominate the top-10 holdings of emerging market funds.
Taiwan Semiconductor Manufacturing
While many in the UK may not have heard of the company, almost anyone who invests in an emerging markets fund owns the semiconductor manufacturer in one way or another.
Taiwan Semiconductor Manufacturing is in fact the world’s largest semiconductor foundry.
The firm’s products are used in everything from mobile phones to computers. Most recently the firm signed a deal with Apple to provide semiconductors for iPads and iPhones.
A massive 120 funds in the IMA universe hold the company in their top-10 holdings, including industry favourites Aberdeen Emerging Markets, Newton Asian Income and Schroder Asian Income. Exactly the same number of funds in the IMA universe hold Taiwan Semiconductor Manufacturing as FTSE 100 giant AstraZeneca, according to FE data.
Some funds hold nearly 8 per cent in the stock, including the Martin Currie Greater China and Skandia Greater China Equity funds.
Of the 66 funds in the IMA Global Emerging Markets sector that FE Analytics has holdings data for, nearly three quarters hold the company in their top 10.
Among the few funds that don’t are smaller companies portfolios – whose market cap wouldn’t allow for the Asian blue-chip firm – and the five crown-rated Carmignac Emergents fund, headed up by FE Alpha Manager Simon Pickard. The £56.7m JPM Emerging Markets Income portfolio also doesn’t hold it in its top-10.
While the stock has continued on a steady rise over the last year, gaining 15.67 per cent, it has fallen since its high on February 19. It is currently yielding 2.97 per cent.
In 2009, the company was accused of giving money to former Taiwanese president Chen Shui-bian, who has since been tried for corruption. However, the charges were later dropped.
China Mobile
The massive and growing population of China has made this state-owned mobile phone operator the largest in the world. Our data shows it’s owned by 67 funds in the IMA universe.
It is another holding that features heavily in the five-crown rated Aberdeen Emerging Markets fund, but the team at First State hasn’t put it in the top-10 holdings of any of their emerging markets or Asia funds.
China Mobile has been fairly volatile over the last year, taking heavy hits in May and August. It is down since the start of the year, but has made 2.9 per cent over the last 12 months.
It is currently yielding 4.3 per cent.
The Dublin-domiciled Legg Mason LMHK China fund has the highest weighting in the mobile provider, at 7.21 per cent. The average fund that counts China Mobile in their top bets holds around 3.36 per cent in the stock.
China Mobile has been plagued by a number of corruption charges in recent years, with a number of high profile ex-officials charged with bribery at various times.
A former vice-chairman of the firm was sentenced to death for accepting more than $1.15m in bribes back in 2011.
Sberbank of Russia
Many of the funds that don’t hold Taiwan Semiconductor Manufacturing – like JPM Emerging Markets Income – instead hold Russian bank Sberbank in their top bets.
In all, 42 funds in the IMA universe hold the Russian bank – the largest bank in Russia and Eastern Europe, and the third largest in Europe – in their top 10 holdings.
The HSBC GIF Russia Equity portfolio holds nearly 10 per cent in the stock alone.
While the bank is a dominant player in Russian and emerging Europe portfolios, 20 portfolios in the IMA Global Emerging Markets sector count the stock as one of their top-10 holdings.
Several specialist financial portfolios like the £513.2m Jupiter Financial Opportunities fund, run by FE Alpha Manager Guy de Blonay, and the Polar Capital Financial Opportunities fund, also have a high weighting to it.
The bank is yielding 2.02 per cent.
Sberbank of Russia has lost 3.43 per cent over the last year. It participated in the rally in the later part of 2012, but the rise wasn’t enough to bring the stock back to positive territory after a sharp fall last May.
It has been caught up in a number of corruption charges over the last decade or so. In early 2010, several branch managers were investigated for defrauding $1.2bn from the bank.
Hargreaves Lansdown’s Mark Dampier (pictured) says investors should be careful of the underlying fundamentals of emerging markets. He says large caps in these markets don’t necessarily have the same defensive benefits as their counterparts in developed markets.
“Large caps in emerging areas tend to be pushed up by overseas investors because you wouldn’t buy some small cap you’ve never heard of,” he said. “You also need to be careful when buying trackers because those will be full of these types of stocks.”
Due to the popularity of such a select group of companies, he says there has to be question marks over valuations.
“They are all big companies and they are pretty much global companies,” he said. “It all depends on the price you pay for it. Just because it’s global and a large company doesn’t mean it’s going to make you money.”
However, Dampier says that investors are best off leaving the experts to picking individual companies, as investors have to accept that single company risk is inherent in all areas of the market – not just in the emerging world.
“I think there’s only so far you can go looking at these things because at the end of the day you’re picking a manager to run it. Aberdeen and First State are prime examples and I wouldn’t tend to delve into the holdings unless they wanted to say something about a particular company.”