While there is a plethora of top-rated funds that focus on the UK, Europe and beyond, First State and Aberdeen have dominated both the performance tables and the inflows charts across the IMA Global Emerging Markets and IMA Asia Pacific ex Japan sectors for many years.
This presents investors with two problems: firstly, as FE Alpha Manager David Coombs recently highlighted, mass inflows can have an adverse impact on performance as managers lose the flexibility that allowed them to build a strong track record in the first place.
Secondly, and as a result of the first, mass inflows force managers to close their funds to new business, in order to protect the interests of existing investors.
As a result, there is a very serious need to identify smaller, nimbler funds to take the baton off the likes of Aberdeen Emerging Markets and First State Global Emerging Markets Leaders, and give incoming investors quality exposure to the world’s fastest growing regions.
With this in mind, we ask three industry professionals to highlight the emerging markets funds they are tipping to be "the next big thing".
M&G Global Emerging Markets
Darius McDermott, managing director of Chelsea Financial, is tipping Matthew Vaight’s four crown-rated M&G Emerging Markets fund to be a future giant of the industry because it has the same characteristics that have made Aberdeen and First State so popular.
"It’s a really good question and we’ve had to do a lot of work to find a replacement," he said.
"We’ve replaced Aberdeen Emerging Markets with M&G Emerging Markets. We’ve learned over time that the best way to outperform – particularly in emerging markets – is to protect against the downside."
"If the market is up 50 per cent one year and you’re only up 30 per cent, and then the next the market’s down 50 per cent and you’re only down 30 per cent, then you’ve done a lot better for yourself."
"Like the Aberdeens and First States out there, we want something that focuses on quality over everything else. M&G Emerging Markets has outperformed around 70 per cent of the time since its launch. It has a very good record in down markets and has managed to keep up pretty well in up periods."
According to FE data, the fund has returned 114.01 per cent since its launch in February 2009, putting it in the top quartile of its IMA Global Emerging Markets sector and ahead of its MSCI Emerging Markets index benchmark.
It has slightly fallen short of its Aberdeen and First State rivals, though.
Performance of funds vs index since launch
Source: FE Analytics
While it has been less volatile than the index over the period, it has been more volatile than both Aberdeen Emerging Markets and First State Global Emerging Markets Leaders. It rose higher than them in the up periods of 2009 and 2010, but has not been as effective in protecting against shocks in the market since then, which has caused it to fall behind.
At £1.1bn it is hardly a minnow, but compared with Aberdeen and First State’s offerings, it has a long way to go. The on and offshore versions of Aberdeen Emerging Markets bring assets under management (AUM) of the total strategy to more than £10bn. First State Global Emerging Markets and Global Emerging Markets Leaders have combined AUM of around £6bn.
Vaight is currently backing Brazil, which has been in the news for all the wrong reasons recently, thanks to the protests that have swept through the nation. The region has a 15.3 per cent weighting in the portfolio – an overweight position of 3.3 percentage points.
Unlike Aberdeen and First State, the fund has significant direct exposure to Japan, though the manager is still underweight.
Vaight runs a multi-cap portfolio with a big overweight in small caps, defined as companies with less than a $2bn market cap.
M&G Global Emerging Markets requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.74 per cent.
Somerset Emerging Markets Dividend Growth
Like Coombs, co-head of multi-manager at F&C Gary Potter (pictured) has often voiced concerns about investors’ over-reliance on giant funds.
"It doesn’t matter how good the captain of the ship is – the larger the ship, the harder it is for the captain to turn it around and reposition it," he said. Looking to the emerging markets sector, he pinpoints Edward Lamb and Edward Robertson’s Somerset Emerging Markets Dividend Growth fund as a rising star in the sector.
The £288m portfolio has only recently achieved a three-year track record, but it has made quite an impression over this time.
Our data shows it has returned 24.3 per cent since its launch in March 2010, comfortably beating its sector and benchmark. It has beaten the Aberdeen Emerging Markets fund over the period, with less volatility, but fallen short of Jonathan Asante’s First State portfolio.
Performance of funds vs sector since Mar 2010
Source: FE Analytics
As its name suggests, Somerset Emerging Markets Dividend Growth targets a growing level of income over the medium- to long-term. The fund is currently yielding 3.3 per cent.
"It’s a lot smaller, but has the same focus on quality as First State," said Potter.
"It just has a smaller amount to play with, and so can be a bit more flexible. I’ve got nothing against Aberdeen or First State and still own them, but I’ve been cutting back my exposure into some of these smaller options."
"This Dividend Growth fund fits the mandate [of our F&C MM Navigator Distribution fund], so we’ve gone for that one," Potter added.
Regionally, the fund is hugely diversified, with no more than 10 per cent of assets invested in a single country. Taiwan, Brazil and Turkey are the fund’s three biggest positions, but Chile, Poland and UAE all have significant weightings.
The five crown-rated Somerset Emerging Markets Dividend Growth fund requires a minimum investment of £1,000 and has an OCF of 1.3 per cent.
Genesis Emerging Market
Bestinvest’s Jason Hollands believes there will be a significant uptick in demand for emerging markets trusts, because there are not enough quality options in the open-ended universe. This is a view shared by FE Research’s Rob Gleeson.
Hollands highlights Andrew Elder’s £268m Genesis Emerging Market IT as the pick of the bunch in the IT Global Emerging Markets sector, which he believes is currently at an attractive entry point for investors.
"I think that perhaps better alternatives [to First State and Aberdeen] are to be found in the closed-ended universe," he said.
"Here we like the Genesis Emerging Market fund, which is currently trading at a 9 per cent discount, the bottom end of its range. Despite a 49 per cent exposure to Asia, the portfolio is only modestly weighted to China, which we like given our concerns over the deceleration in China’s growth story."
China has a 12.7 per cent weighting in the trust.
Genesis Emerging Market is well ahead of its MSCI EM benchmark over the long-term, as well as over one and five years; however, it has fallen slightly short over three.
It tends to significantly outperform in rising markets but has struggled in falling ones. It followed losses of more than 48 per cent in 2008 with gains of almost 100 per cent in 2009. This compares with a loss of 45 per cent from the MSCI EM index, and a gain of 62 per cent.
The trust is very long-term in its approach, believing that the best way to play the region is by buying undervalued companies and sticking with them over the market cycle. The managers state that they invest on a five-year horizon at the very least.
The four crown-rated Genesis Emerging Market trust has ongoing charges of 1.69 per cent and is not geared.
