The underperformance of emerging market equities has been well-documented of late, with the MSCI Emerging Markets index losing 3.85 per cent so far this year, compared with gains of 15.61 per cent from the wider MSCI AC World index.
Performance of indices year to date
Source: FE Analytics
Some experts are saying this underperformance has presented investors with a perfect buying opportunity.
However Harris (pictured), who manages a number of funds of funds at City Financial, is holding off buying emerging market portfolios at the moment as he says the asset class could fall further over the short-term as there are still reasons why sentiment will remain negative. Nevertheless, he says the time to get into emerging markets is not far off.
"A lot of what will happen with emerging markets will depend on tapering as a lot of excesses have built up and a lot of these markets have current account issues," he explained.
"Yes, emerging markets have already been hit hard but I would like to see them fall by another 10 or 15 per cent before I see them as good value. If that were to happen, then I would certainly get in there."
"Sentiment is already quite negative, and so we could see a bounce-back in the short-term. However, whether that will be sustainable is a different question," he added.
Harris says that emerging market equities will bottom-out over the short-term as macroeconomic data is becoming more supportive, but he says there is no need to rush into the asset class.
"China is extremely cheap – well if you believe the accounts of valuations that are being given. There have been signs that indicate that economic data is improving at a headline level," Harris said.
"In the tough few months since the sell-off, emerging market equities have held up and so have commodity stocks. However, you have to be extremely selective with emerging markets. It might be the case that you shouldn’t enter the market too early – let it show its hand first," he added.
Instead of buying emerging market funds at this point in time, Harris says he is looking at the battered and unloved commodities sector as a way of playing the same theme.
"I have a bit of the BlackRock World Mining trust and I also hold an ETF [exchange traded fund] – the DBX Stocks Europe 600 Basic Resources ETF. If a private investor wanted to do this, I would say go for one of the mega cap miners," he said.
BlackRock World Mining IT is headed up by FE Alpha Manager Evy Hambro.
According to FE Analytics, the closed-ended fund has lost 6.83 per cent over the 12 months. However, it has fared much better than its benchmark – the HSBC Global Mining index – which has lost 13.15 per cent.
Performance of trust vs index over 1yr
Source: FE Analytics
The trust is currently trading on an 8.62 per cent discount to its NAV and has a yield of 4.29 per cent. The BlackRock World Mining trust has gearing of 9 per cent and ongoing charges of 1.42 per cent.
Harris says he is using the BlackRock investment trust and the ETF within his funds as they should be among the main beneficiaries of better economic data coming out of China, as its use of resources increases.
He adds that the reasons why he decided to go for commodities exposure instead of going via emerging markets funds is because of the cheapness of resources stocks and the fact these companies are now more efficiently managed.
"The improvement in company management is a slightly longer term story, but the really big driver of these companies is China as it underpins commodity prices," he said. "The other reason for buying into the sector is because it is extremely cheap."
"Valuations were pricing in not far off the equivalent of another Lehmans crisis. Even if it isn’t a long-term story, it could be the case that you make 20 or 30 per cent quickly and then get out," he added.
Having previously managed multi-asset portfolios at both New Star and Henderson Global Investors, Harris took over the City Financial fund of funds range in January this year.
Two of his funds – City Financial Global Multi Strategy and City Financial Multimanager Income – have been top-quartile performers in the IMA Mixed Investment 20%-60% Shares sector since he took over, with returns of 8.82 per cent and 8.16 per cent, respectively.
Performance of funds vs sector in 2013
Source: FE Analytics
Harris’s funds tend to have an ongoing charges figure (OCF) of around 2.5 per cent and all require a minimum investment of £1,000.
