Investors could be missing out if they aren’t looking within the IA Specialist sector before buying into emerging market funds, according to Carmignac’s Xavier Hovasse (pictured). 
The head of emerging equities at the firm runs four emerging market funds, yet only one of them resides in the IA Global Emerging Markets sector.
Many investors have been deterred from buying into emerging markets generally over recent years due to the market area’s struggle to recover from 2008’s financial crisis. Sentiment has been further dented by the strong dollar, the collapse in commodity prices, China’s slowdown and impending rate hikes from the Federal Reserve.
Performance of indices from 2008 to end of 2015
Source: FE Analytics
This cautious stance has been lifted somewhat since February’s mass sell-off following Fed chairperson Janet Yellen’s increased dovishness, the fact the dollar has stopped jumping in value and the price of oil creeping back up to near $50 per barrel.
“In an environment characterised by volatile commodity prices, rising rates and uncertainties around China, emerging markets will remain complex. However investment opportunities will always exist, and even more in a complex environment,” Hovasse said.
“Investors will have to steer a difficult course between Latin America’s positive political changes, China’s economic transition, India’s promising reform process and turmoil in the Middle East. In this uncertain and fragile climate for emerging markets, investors should focus on picking the regions, sectors and stocks that combine the ability to generate cash with virtually secular growth prospects.”
While the manager says there is “no miracle solution”, he adds that a combination of looking for opportunities in unpenetrated sectors for long-term growth themes and meticulous bottom-up stock selection can lead to exciting opportunities within emerging markets.
This process has stood him in good stead as, over Hovasse and co-manager David Young Park’s 14-month tenure of Carmignac Emergents, the fund has outperformed the MSCI World index by 1.66 percentage points with a loss of 7.54 per cent.
It also has achieved this with a maximum drawdown – which measures what would have been lost if bought and sold at the worst possible times – of 16.01 per cent compared to its benchmark’s drawdown of 22.12 per cent.
Performance of fund vs benchmark under Hovasse and Young Park
Source: FE Analytics
To the end of 2015 when emerging markets were enduring a particularly torrid time, Carmignac Emergents gained 5.15 per cent while the MSCI Emerging Markets index was down 5.23 per cent.
“There are several reasons for our outperformance, related to our investment process and the fund’s un-benchmarked approach and active management,” Hovasse continued.
“As an investor, what was key during these stressed times was to avoid the most costly threats, to manage well the most complex ones, and not to miss the opportunities.”
For instance, the managers’ Mexican portfolio made a strong contribution to the fund to the end of 2015, which is their highest-conviction play (in terms of region, the fund’s weighting to the Americas is currently 22.77 per cent). They also avoided risky markets such as Brazil and were cautious on China, which meant they were relatively sheltered from the its burst bubble in August 2015.
While the fund has performed well though, there is every chance that investors could be overlooking the vehicle because it resides in the IA Specialist sector, rather than sitting with its peers in the IA Global Emerging Markets sector.
“Carmignac Emergents is a reasonably large fund, with over €1.1bn of assets under management, but is not on the radar for retail investors or UK advisers – its position in the IA Specialist sector doesn’t help with its low profile,” Informed Choice’s Martin Bamford said.
“In terms of performance, the fund has done reasonably well over the past five years; the performance has not been stellar, but it has held its own compared to other emerging market equity funds during a difficult period of time for this market.”
“This reflects a reasonably cautious long-term approach taken by the managers and a higher than typical allocation to cash within the portfolio. This cautious approach combined with currency hedging within the fund makes it worth a look for investors who want exposure to emerging market equities but have concerns about the continued volatility in this market.”
Hovasse says that the fund has been in the IA Specialist sector since last year, when the Investment Association moved the fund because IA Global Emerging Markets funds are required to hold at least 80 per cent of their assets in emerging market regions.
Because of Carmignac Emergents’ unconstrained approach and use of hedging techniques (the managers are able to take short positions which means the fund’s emerging market exposure can fall to 60 per cent), the fund was moved.
“While we understand the IA decision, we remain convinced that flexibility is key when navigating such a heterogeneous universe in such a difficult market environment,” Hovasse said.
“Investors should think out of the box and look for strategies out of traditional fund categories to build their portfolio. Otherwise they could miss some gems. Note also that other well-known EM players such as Schroders or Stewart Investors (ex First State) are also included in this IA Specialist sector.”
Ben Willis, head of research at Whitechurch Securities, argues that the fund is an emerging market fund first and foremost so investors specifically looking for exposure to that area of the market shouldn’t be deterred by the fact is resides in the IA Specialist sector.
“It is managed by highly regarded Xavier Hovasse and David Park and it is a core fund so provides a good starting point for investors looking to gain exposure to these markets,” he said.
“The management team adopts both a top-down and bottom up approach. The top-down view focuses on economies with current account surpluses and sectors that have a long-term growth bias (i.e. domestic consumption). Whilst from a bottom up perspective, strong free cash flow, low debt levels and capital lights businesses that can self-finance growth are sought.”
“The team will use hedges to reduce net exposure if they don’t like the short-term outlook and they will hedge currencies too. Overall, the fund represents a good defensive, quality focused holding and should appeal to investors looking to go back into these markets.”
As to be expected though, the fund doesn’t appeal to everybody. It is very high conviction in terms of its sector weightings for instance and Tilney Bestinvest’s Jason Hollands says that the fund’s 37.9 per cent allocation to telecom, media & technology stocks could be a deterrent from investing in it.
“The main point I would make is that the longstanding manager of this fund left last year, so I would want to see a much longer track record from the current team before backing it,” he explained.
“It also currently has a high exposure to information technology, at almost a third of the portfolio. I prefer funds with a more diversified approach to sectors when investing in markets which typically exhibit high levels of volatility.”
Carmignac Emergents has a clean ongoing charges figure of 1.16 per cent.
