This is reminiscent of what was happening in the UK sectors until recently: in a broadly sideways-moving market, a number of funds run by less well-known managers with smaller amounts of assets under management were leading the pack.
The likes of Unicorn UK Income, Unicorn Outstanding British Companies, Liontrust Special Situations and Cavendish Opportunities were consistently at the top of the performance tables as many of the larger funds run by the big houses struggled to keep up.
By contrast, the emerging markets sectors were dominated by a few giant funds managed by Aberdeen and First State, with a sprinkling run by Schroders and Newton.
First State may have been considered a boutique at one point, but the enormous amount of assets under management in its Asian and emerging markets funds makes it harder to think of it this way now.
In a number of studies, FE Trustnet has showed that boutique funds in general tend to outperform, with their managers being disproportionately represented in the FE Alpha Manager rankings.
The reasons for this were generally considered to be that boutique managers have more freedom to back their instincts.
A manager who is only allowed to depart from a benchmark by a certain amount therefore is limited by the amount they can outperform and underperform
On top of this, the small size of boutique funds means that they have fewer issues with liquidity: if they want to sell out of their positions and buy something new it is much easier for them to do it without moving the price against them.
They also have a wider universe to choose from, as very large funds can only take meaningful positions in very large companies, at least without building a market-moving stake that would make it very difficult to exit.
All commentators on emerging markets agree that this is a difficult period for investors. With the FTSE All-World Emerging Markets index currently having lost 8.81 per cent over three years, the funds that invest alongside the benchmark have found it tougher going.
Performance of indices over 3yrs
Source: FE Analytics
Thirty of the funds in the IMA Global Emerging Markets sector out of 50 with a three-year history have lost money over that time.
Emerging markets managers have warned that it looks likely to get tougher before it gets better: Jonathan Asante (pictured), manager of the First State Global Emerging Markets Leaders fund and the firm’s head of emerging market equities, is certainly of this view.
He is considering moving his fund into IMA Global to allow it to invest in companies that are listed outside emerging markets but derive their profits from the sector. He explicitly cites the poor quality of funds on the major indices as the reason for this move.
Aberdeen has made no such statements, but has moved to soft-close its emerging markets funds, suggesting liquidity is becoming an issue for the larger products.
All this suggests there is a case for looking at smaller, nimbler funds run by benchmark-free stockpickers, and that is backed up by the FE fund rankings.
Aside from First State and Aberdeen, the only three funds to have received the maximum FE Crown rating in the IMA Global Emerging Market sector are run by boutiques: Somerset Emerging Markets Dividend Growth, McInroy & Wood Emerging Markets and Charlemagne Magna Emerging Markets Dividend.
Performance over the past three years is given a greater weighting when the rankings are calculated, suggesting these funds are more suited to the most recent conditions than their larger rivals.
Somerset Emerging Markets Dividend Growth is now at £315m and Somerset says it will be soft-closed when it reaches $2.5bn.
The fund has made 19.09 per cent since launch in March 2010 while the average fund in the sector has lost 2.92 per cent, according to data from FE Analytics. It is yielding 3.3 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
McInroy & Wood Emerging Markets is only £46m in size but has a similar record of outperformance, making 16.96 per cent over three years while the sector average has made just 2.21 per cent.
The fund is available on few platforms and has a high minimum investment of £10,000, which explains why it has grown less quickly.
Both funds are run with a benchmark-free stockpicking approach, which our data shows has been very successful of late.
Charlemagne Magna Emerging Markets Dividend has the best three-year record of the three funds, having returned 23.33 per cent.
Performance of funds vs sector over 3yrs
Source: FE Analytics
The £55m fund, which is managed by Julian Mayo and Mark Bickford-Smith, is currently yielding 4.99 per cent.
It is clear from looking at FE Trustnet figures that having a low tracking error to the MSCI Emerging Markets index has been critical to outperformance over the past three years.
Of the 13 funds with top-quartile annualised returns over that time, eight are in the bottom quartile for tracking error – that is to say the figure is larger – while four are in the third quartile.
Aside from looking for off-benchmark ways to invest in emerging markets, investors’ other main option is to try to buy on valuations, working on the assumption that the index will revert to long-term trends and hoping to call the bottom of the market.
However, comments this morning from Artemis’ Simon Edelsten underline the difficulties with this approach. Edelsten says that the valuation models used by many investors and commentators are flawed.
If the current market conditions still have some time to run, emerging market boutiques could be the place to be.
