According to data from FE Analytics the £3.7bn Aberdeen Emerging Markets fund lost 9.51 per cent in the three months to 30 June, while the MSCI Emerging Markets index lost 7.97 per cent.
Performance of fund vs index in second quarter
Source: FE Analytics
Kaloo (pictured) says that the fund has suffered from both its geographical and stock selection strategy.
"Why did we underperform? There were two big issues," he said. "One: asset allocation. We have had more in the countries that have seen the biggest sell-off in currencies, such as Brazil and Turkey." "We are also underweight countries with fixed currencies like China and Taiwan. The currency issue has been a major issue for us."
"These asset allocation results have led through to relative negative performance which has not been offset by stock selection, which has been flat or negative over the past three months."
"A number of the stocks that did well for us in Q1 sold off as people took profits, such as our holdings in Mexico, the Philippines and Turkey."
"It was made worse by some political developments in Turkey, for example."
Turkey has seen protests against the government of Recep Erdogan that turned violent. Kaloo says he has taken the opportunity to top up the Turkish banks he holds.
"Also, we have had one or two companies that have disappointed, including some of our Indian holdings, such as Infosys, which saw disappointing results and sold off as a result."
"Banorte, a Mexican bank, was made worse because they announced a major rights issue."
The rights issue will dilute the value of existing shareholdings and has prompted a share price fall of 25 per cent since April.
Aberdeen Emerging Markets has 2.39 per cent in the stock compared with 0.31 per cent from its benchmark, making it a significant overweight.
"Banco Bradesco has suffered in the particularly bad market sell-off in Brazil."
Data from FE Analytics shows that the Brazilian market has come under pressure recently, losing 13.75 per cent in the year-to-date.
Performance of indices in 2013
Source: FE Analytics
Aberdeen Emerging Markets has 16.1 per cent in the country, and Banco Bradesco is a top-10 holding, accounting for 3.3 per cent of the fund.
The performance of the Aberdeen Global Emerging Markets Smaller Companies fund has also been hit by currency issues, Kaloo explains, although it has managed to marginally outperform its benchmark.
The MSCI Emerging Markets Small Cap index lost 7.36 per cent in the three months to 30 June, while the fund lost just 6.64 per cent.
Performance of fund vs index in 2013
Source: FE Analytics
Aberdeen’s underweight in Taiwan has dragged on performance, he explains, with the country having one of the strongest currencies during the period.
"Emerging market economies remain in pretty good shape," Kaloo said. "There has been some talk of us experiencing another 1997 [the Asian financial crisis], but that seems far-fetched."
"We see no major imbalances within the economies: net debt is low and fiscal balance sheets are improving in most companies."
One of the concerns investors have about the developing world is the threat of inflation, but Kaloo says he thinks this will subside.
"When you look at emerging markets overall, interest rates and inflation remain pretty low. We’re unlikely to see a major spike in the near future."
"There’s a risk as weaker currency feeds through that countries may be prompted to raise rates, but we think, given the weakness in the global environment, inflationary pressures will start to ease again and countries have scope to cut interest rates altogether."
The manager says that it’s possible weaker growth in emerging markets could end up being good for businesses in the sector.
A slowdown in growth could see more companies reducing their capital expenditure and therefore increasing free cash-flow to the firm, a sign of financial solvency that is supportive of equity valuations.
He suggests that the sector may have just experienced a cyclical slowdown, meaning that there is a reasonable chance the cycle will turn and returns will improve.
"The fundamentals are looking in pretty good shape," Kaloo said.
The manager’s optimism contrasts with the view of First State’s FE Alpha Managers Jonathan Asante and Angus Tulloch, who are sceptical of the quality of most companies in emerging markets and favour buying developed world equities selling into the regions.
Aberdeen Emerging Markets has also underperformed its sector average over six and 12 months, albeit marginally. However, it is ahead of the MSCI Emerging Markets index over both timeframes.
Needless to say, the recent underperformance has not been enough to derail the fund over the longer term. Our data shows it is number-one in the IMA Global Emerging Markets sector over a 10-year period, with returns of 441.17 per cent.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Aberdeen Emerging Markets and Aberdeen Global Emerging Markets Smaller Companies both introduced 2 per cent initial charges earlier this year as the fund house sought to limit inflows.
FE Trustnet recently asked whether it was worth paying the 2 per cent given the funds’ record of consistent outperformance.
We also looked at alternatives for investors who were unprepared to pay the fee.
Aberdeen Emerging Markets has ongoing charges of 1.9 per cent, and the small cap fund is marginally more expensive, at 2.05 per cent.
