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Are GEMs a closed shop?

Global emerging markets may be increasingly popular but the dominance of just a few funds from a handful of providers means investors are faced with limited choice. Such is the popularity of the leading names that it has become daunting for new launches. The situation is exacerbated by the fact that several of the most loved funds have either soft-closed or are just about to.

Although emerging market portfolios have attracted a lot of attention and several providers have launched single-country portfolios in this sector, investors still prefer diversified offerings. According to Cofunds, emerging market fund sales are predominantly GEM portfolios as opposed to single-country mandates.

The IMA’s GEM sector sees 3-4 per cent of net sales each month via the Cofunds platform. That may seem low but the sector is experiencing far fewer redemptions than other areas, causing it to accelerate faster and showing that the money headed into these funds is sticky. At a roundtable event on emerging markets in late October, Cofunds reported that even through the more recent volatile August and September periods, GEM portfolios did not see as much in outflows as other fund sectors.

According to the platform, the top five best-selling funds over the past year have been the £2.5bn Aberdeen emerging markets, the £1.8bn First State global emerging markets leaders, £876m JPM emerging markets, £136m First State global emerging markets sustainable and the £608m Baillie Gifford emerging markets growth funds.

With the exception of First State sustainable, the funds are also the top five best-selling GEM portfolios on Cofunds over the past three years. Lazard emerging markets rounds out the top five over the longer period.

In 2009, it was reported that Aberdeen intended to soft-close its emerging markets fund, just under £1bn in size at the time, and, more recently, its GEM portfolio. Meanwhile, First State is reportedly looking to soft-close its leaders portfolio from January.

Despite these attempts to handle capacity, inflows into these funds continue. But is that because they are good quality or because there is a lack of any real competition? According to some, it is both, with the former creating barriers for new entrants. According to Cofunds, there have been just 11 fund launches in the diversified emerging markets sector in the past five years.

Due to the variances between countries, economies and markets that make up the developing world, investment teams require substantial resources and expertise, says John Husselbee, CEO at multi-manager North. Both Aberdeen and First State have built their teams up over years, making it difficult for others to compete. Husselbee says the processes created by these two groups and the returns they have achieved means they are a safe pair of hands for investors looking for diversified emerging market exposure.

Peter Toogood, investment services director at OBSR, says the ratings group looks for common decision-making in GEM funds: a dominant methodology as opposed to a dominant personality heading a portfolio. Although Angus Tulloch and Hugh Young are highly respected managers in their own right, it is the teams they have developed that have enabled their funds to flourish.

At the same time, their performance has also kept investors happy. According to Style Research, over one, three and six months, as well as one and two years to August 31, the Aberdeen and First State GEM funds are among the top 25 performers across the 315 UK-registered GEM funds it analyses.

FE Analytics figures show similar consistency. Over one, three and five years to the end of October, Aberdeen and First have two funds each within the top 10 best-returning funds in the GEM market.

Over the five years to October 27, the First State Leaders fund is up by 102.27 per cent and is ranked first in the IMA sector, followed by the Aberdeen GEM fund with returns of 101.87 per cent. Ranked third over the five years is Aberdeen emerging markets, up by 99.67 per cent, and fourth is First State GEM, up by 98.62 per cent. All four funds are close in gains but the returns of the next best performer, Dimensional emerging market core, are more than 25 percentage points less.

One new fund making headway in this space is from boutique group Hexam. But Husselbee notes this GEM fund is a very different beast, meaning investors are more apt to hold it alongside the Aberdeen and First State funds rather than as an alternative.

He says: “Aberdeen and First State are capital preservation vehicles in high beta markets, while Hexam embraces the beta.”

However, like Aberdeen and First State, the Hexam managers are stockpickers who have substantial experience operating in these markets, which is why they are able to generate attention. It is a similar story for the offerings from Lazards, Baillie Gifford and JPM, all of which have offered GEM funds for more than a decade.

Principal of Style Research Robert Schwob says that despite the common theme of outperformance, the Aberdeen and First State portfolios are run very differently. Despite the closeness in their returns as of August, First State’s leaders fund was light on mega-caps, overweight utilities, dramatically overweight consumer goods and underweight financials. According to Aberdeen’s latest factsheet, the emerging market fund has its biggest sectoral position in financials at 31 per cent, followed by consumer staples at 11.9 per cent and technology at 10.2.

The success of these two providers in GEM management may be good news for them and may have made fund selection easy for advisers but the situation is unsustainable. Toogood says: “The winners in this sector are quite clear but there is a genuine struggle to find new players and capacity for the existing ones is a growing problem.”


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