The emerging market funds worth adding to your ISA this year

Lazard Emerging Markets, JPMorgan Emerging Markets and Templeton Emerging Markets are some of the options experts recommended for anyone looking to add some emerging market exposure to their ISA.

Emerging markets are typically classed as a riskier investment versus developed market options such as the UK and the US, and this factor has only increased in recent weeks due to Russia and the surrounding geopolitical issues, according to Darius McDermott, managing director of FundCalibre.

Several emerging funds found themselves caught out with a weighty exposure to Russia when Putin decided to attack the Ukraine just over a month ago, but there are other risks around China which McDermott said have made it a tricker asset class to navigate.

McDermott said that “investors should understand that the risk of investing in emerging markets is higher now than it was a few years ago.

“Russia is now un-investable and increasing geo-political tensions and a clamp down on private companies in China have upped the risks.”

However, there are advantages to the asset class such as lower valuations, which was highlighted by the sharp rebound in Chinese stocks earlier this month, and higher potential growth than their developed peers over the long term. Allocation and position size will be the key.

“Whether emerging markets should be a core or satellite holding in a portfolio, that will very much come down to the individual. A younger investor with a good appetite for risk may make it one of their core holdings, but an older investor or someone who doesn't like too much volatility would have a much smaller satellite holding,” he said.

JPMorgan Emerging Markets

The most popular recommendation among experts was the JPMorgan Emerging Markets trust, with three people highlighting it as a strong option for emerging market investors.

Emma Bird from Winterflood and Priyesh Parmar of Numis investment bank suggested the fund as a core option in a diversified portfolio.

The pair noted the strength of “highly experienced” manager Austin Forey, who has run the fund since 1994 and was joined by John Citron last year as co-manager.

Forey’s investment thesis is centred on well-managed businesses with strong market positions and positive cash flows. In particular, these were companies which Parmar said “could generate value regardless of short-term economic or political developments” – an important characteristic given the current macroeconomic backdrop.

Because of this growth bias the trust is underweight industrials, materials and energy, preferring consumer staples, financials and technology stocks.

Long-term this method has generated strong returns, with the trust making the second highest returns in the IT Global Emerging Markets sector in the past decade (126.7%).

Performance of trust vs sector and benchmark over 10yrs

Source: FE Analytics

However, because of these more cyclical underweights the trust had lagged in the near term, ranking in the third quartile, when these sectors have rallied during the Covid-reopening trades.

Despite this, Bird was still positive on the trust, noting: “We would expect the team’s stock-picking ability to enable it to continue its record of outperformance over the long term”.

The £1.5bn trust is currently on a 9.5% discount and James Carthew, head of investment companies, QuotedData, who also recommended the trust, noted that the management fees were cut last year to 0.75%, meaning “the trust now comes with the lowest expense ratio in its sector”.

Templeton Emerging Markets

Rob Morgan, Charles Stanley’s chief analyst, said that emerging markets “represents an important strand of a growth portfolio”, for which he recommended the Templeton Emerging Markets trust as a “core option, given the breadth and experience of the management and analyst team and the higher-conviction approach adopted”.

At £1.8bn it is the biggest IT Global Emerging Markets and Morgan said it provided “some differentiation compared with an open-ended equivalent” because it could invest in private and pre-initial public offering (IPO) opportunities. “This is a potentially attractive expansion of the team’s investment universe,” he said.

The trust was launched in 1989 and has been run by Chetan Sehgal since 2017, with Andrew Ness joining as co-manager a year later.

Over 10 years the trust has underperformed versus the MSCI Emerging Market index, making 52.4% versus 64.5%, but it beat the average sector returns (49.6%).

Performance of trust vs sector and benchmark over 10yrs

  Source: FE Analytics

Lazard Emerging Markets

Moving into the open-ended space, Laith Khalaf, head of investment analysis at AJ Bell, recommended the Lazard Emerging Markets fund because it incorporates both bottom-up and top-down factors.

“Longstanding manager, James Donald, is at the helm and has a wealth of analytical resources at his disposal,” Khalaf said.

Long-term the fund’s performance has lagged versus the IA Global Emerging Markets sector, making 43% over 10 years whereas its average peer made 55.2%. Over the past year, however, the fund has held up better than the sector and MSCI Emerging Market index, losing just 0.8% compared to 9.6% and 11.3%, respectively.

VinaCapital Vietnam Opportunity

For investors wanting more country specific exposure Parmar recommended the VinaCapital Vietnam Opportunity trust.

The associate director said the trust could provide “an attractive way to gain exposure to the domestic growth story in Vietnam,” that centred on “an export manufacturing-based economy supported by a large, young and dynamic workforce”.

The £803m portfolio is mainly invested in listed equities but also can hold private and unlisted stocks, making it “clearly differentiated from its peers,” Parmar said.

Performance of trust vs sector and benchmark over 10yrs

Source: FE Analytics

Currently on a 23% share price discount Parmar said it “offered good value for money”, while its returns have been strong. A member of the IT Country Specialist sector it has made 1,550.7% since it launched in 2003.