Following a period of extended underperformance relative to developed markets, emerging market equities are once again back in favour on the back of extremely low valuations.
Though investors may be looking to buy into the sector, the latest FE Trustnet study highlights that a large proportion of IMA Global Emerging Markets funds have failed to deliver market beating returns in the past.
FE data shows the IMA Global Emerging Markets sector average has returned 36.98 per cent compared to the index’s return of 41.73 per cent. When you drill down, however, it makes for even worse reading.
Performance of sector vs index over 5yrs
Source: FE Analytics
Though not all of the funds use the MSCI Emerging Markets index as a benchmark, according to FE Analytics, only 15 out of 43 large-cap funds in the sector have outperformed the index over five years.
Among those 15 funds are portfolios run by First State and Aberdeen, which have been the two dominant groups in the sector over the past 10 years or so.
However, the two houses have seen massive inflows leaving of number of their portfolios near, or at, capacity; meaning investors have had to look for other options in the sector.
If you were to take Aberdeen Global Emerging Markets Equity, Aberdeen Emerging Markets, First State Global Emerging Markets, First State Global Emerging Markets Leaders and First State Global Emerging Markets Sustainability out of the study – all of which have been top quartile over five years – only 24 per cent of the remaining funds have managed to beat the index over the period.
The top five performing funds in the sector over five years, when you exclude smaller companies funds and the First State and Aberdeen-run portfolios, have been McInroy & Wood Emerging Markets, Lazard Emerging Markets, Invesco Perpetual Emerging Countries, M&G Global Emerging Markets and Hermes Global Emerging Markets.
Our research shows that the large majority of active managers have failed to outperform on a consistent basis as well.
The last five years have been a volatile time for emerging markets.
The MSCI Emerging Markets index bounced back strongly in 2009 and 2010 after the financial crisis, but fell 17.82 per cent in 2011 when fears over slowing growth in China intensified.
The index rebounded again in 2012, but lost 4.41 per cent last year as investors toiled with the effects QE tapering would have on developing economies.
According to FE Analytics, out of the 35 large-cap funds that have a long enough track record, 23 of them – or 65 per cent – have underperformed in three or more of the last five full calendar years.
Nine of those have only beaten the index in two of the last five years, while 11 have beaten the index in only one year.
Henderson Emerging Markets, Santander Global Emerging Shares Portfolio and Scot Wid Emerging Markets are the three funds that underperformed the index in 2009, 2010, 2011, 2012 and 2013.
While all three have made a positive return in 2014, they are all underperforming against the index so far this year.
Performance of funds vs index over 5yrs
Source: FE Analytics
There are a few funds that have bucked the trend, however.
James Donald’s £695m Lazard Emerging Markets fund has been a top quartile performer in the sector over a cumulative five-year period with returns of 53.
23 per cent and is the only large-cap portfolio in the sector to have beaten the index in each of the last five calendar years.
Source: FE Analytics
The four crown-rated fund has also beaten the index in eight of the last 10 calendar years and is up against its benchmark so far in 2014 with returns of 11.79 per cent.
The two Aberdeen funds, two First State funds and McInroy & Wood Emerging Markets are the five funds that have outperformed in four of the last five calendar years.
Somerset Global Emerging Markets, Invesco Perpetual Emerging Countries and BlackRock Emerging Markets Equity are among the six funds that have beaten the index in three of the last five years.
Ben Willis, head of research at Whitechurch, says there won’t be just one reason why so many emerging market funds have underperformed over recent years.
“I’d imagine that charges will have something to do with it, but then style biases, whether they have looked further down the market cap spectrum or their regional allocations will have all played a part; so you can’t put your finger on just one aspect,” Willis (pictured) said.“The main thing it shows that a lot of these managers, for whatever reason, have got it wrong.”
For his emerging markets exposure, Willis had used Aberdeen and First State funds but does not any more due to size concerns.
He now blends the Templeton Emerging Markets Investment Trust and JPM Emerging Markets Income fund.
Both portfolios weren’t included in the study as the first isn’t in the sector and the second doesn’t have a five year track record.
However, Willis says the research shows how much of a difficult position investors are in if they to go down the active route for their emerging markets allocation.
“That’s the problem, take Aberdeen and First State out of the equation and what are you left with? That’s certainly the problem we had,” Willis said.
In an article later this week, we will analyse a number of the top-rated emerging markets tracker funds for investors to consider.
