The company only has three funds – Somerset Global Emerging Markets, Somerset Emerging Markets Dividend Growth and Somerset Emerging Markets Small Cap – all of which have less than £175m of assets under management.
They took the decision to completely soft-close their small cap fund, which is run by FE Alpha Manager Mark Asquith, in May 2011 when it had only reached £60m.
Oliver Crawley (pictured), who is a partner at Somerset, says managers should not allow their funds to grow too large as the macro conditions mean they need that flexibility to make consistent returns."Ultimately, running too much money in any asset class becomes the enemy of Alpha generation and outperformance," he said.
"In emerging markets, liquidity is extremely important. Illiquidity is a concern because it impedes the ability to exit certain markets or stocks when desired, for example if the macro climate becomes untenable."
"We believe it is therefore vital to cap our products to ensure sufficient liquidity is maintained."
"Mark Asquith’s expertise in small cap investing allows him to maintain a concentrated 40-stock portfolio, a conviction-led portfolio, and this is supported by the maintenance of a nimble fund."
The £65m Somerset Emerging Markets Small Cap fund was launched in November 2010.
According to FE Analytics, over that time it is a top-quartile performer in the IMA Global Emerging Markets sector, with returns of 7.19 per cent.
Its MSCI Emerging Markets benchmark index returned 2.6 per cent in this time.
Performance of fund vs sector and index since Nov 2010
Source: FE Analytics
The fund has tended to be considerably less volatile than both its benchmark and its peers over this time.
One of the fund’s main competitors, the five crown-rated Aberdeen Global Emerging Markets Smaller Companies fund, has $3.2bn worth of assets under management.
It has been the best-performing portfolio in the IMA Global Emerging Markets sector over both three and five years, however it too was soft-closed to new investors earlier this month.
Asquith (pictured) says that having a nimble portfolio will be important over the coming year, as there are a number of potential headwinds on the horizon.
"We think valuations are stretched, particularly in the consumer sector," he said. "Emerging markets continue to trade at a discount to developed markets but this discount is narrowing – active management is becoming increasingly valuable."
"Also, currency and macro risk has arguably increased with the large foreign inflows into emerging markets fixed income," he added.
With that in mind, Asquith says he is looking to more unfashionable emerging markets to add value to his portfolio.
"It is still difficult to find new ideas in the consumer – especially consumer staples – sector, owing to high valuations and assumptions about the sustainability of some demographic trends," he said.
"Eastern Europe and India seem more attractive in terms of risk/return than south-east Asia. South Africa’s attractive companies can still be purchased at reasonable valuations but the macro risk makes a much larger allocation difficult."
"Recent purchases have been quality industrial companies or select opportunities below $400m market cap, which rival small cap products are focusing less on."
Investors who want access to Somerset can still buy the Somerset Global Emerging Markets and Somerset Global Emerging Market Dividend Growth – both of which require a minimum investment of £2,000 and have ongoing charges fees (OCF) of 1.85 per cent and 1.36 per cent, respectively.
Somerset Global Emerging Market Dividend Growth has an estimated yield of 3.3 per cent according to the fund's latest factsheet.
Both funds beat the MSCI Emerging Markets index and the sector in both 2011 and 2012.
The £9.5m Somerset Emerging Markets fund, which was launched in December 2008, is top quartile over three years, with returns of 20.1 per cent.
Crawley says all three funds have the same mind-set of bottom-up value investing in order to deliver consistent returns.
"Our approach and philosophy are anchored by consistency," he said.
"All our emerging markets funds are managed in the same way, to the same high standards of analysis and conviction. Fund managers actively manage their portfolios because we believe that this is the best way to reduce risk – we do not simply follow the index."
"Mark Asquith seeks to exploit informational asymmetries through his bottom-up research, which enables discovery of stocks that may either not be seen by the top-down investor or neglected due to macro sentiment."
"However, we would describe our approach as 70 per cent bottom-up with a 30 per cent top-down macro overlay. This means we make investment decisions based on the individual stock merits but use macro research to support this approach."
"In practice, this macro overlay does not provoke buy-decisions, but it can provoke sell-decisions if the macro risks are deemed to be disproportionate," he added.