Following the soft closure of the Aberdeen Emerging Markets fund and the First State Global Emerging Market Leaders funds, we have been receiving queries from advisers about what remains in the emerging market investment universe.
Investing in emerging markets has been particularly challenging of late as events in developed economies, particularly surrounding the Federal Reserve and the tapering of its quantitative easing package, have been taking their toll on emerging nations.
As idiosyncrasies particular to each region develop, we have been noticing that funds that invest with regional biases – investing, for example, in countries with current account surpluses or low requirements for foreign debt – or sector biases, focussing on consumer stocks for instance, have been delivering good returns. There are a number of funds that we have been exploring recently and which we believe offer good access to emerging market equities.
First up is the Robeco Conservative Emerging Equities fund. This is a low-volatility strategy, run by a solid quantitative house and the fund currently has $1.4bn in assets under management. The fund is well diversified at both a sector and a stock basis: the managers target a low beta – an attractive characteristic amidst the volatility of emerging markets. This also makes its profile not too dissimilar to the First State fund.
As an alternative, investors might consider the Lombard Odier Emerging Consumer fund. This fund also targets low volatility and invests primarily in fast-moving consumer goods stocks.
Although ultimately a sector fund, the managers apply a top-down approach to identify themes of demographics, consumer trends and industry dynamics. The fund holds a large number of both cyclical and non-cyclical consumer stocks which somewhat makes up for lack of diversification from a sector perspective.
For a different style, more akin to the Aberdeen fund, there is the Fidelity Emerging Markets fund. Run by Nick Price, Fidelity’s head of emerging markets, the fund utilises the best large-cap ideas of three regional portfolios. The focus is on companies with superior business models, sustainable profitability and a consistent track record.
Alternatively, investors might look to the M&G Emerging Markets fund. Investing across the capitalisation space, the managers employ a bottom-up approach and focus on value stocks, closely examining company fundamentals as well as valuations. The fund can be an excellent diversifier in an emerging market portfolio.
To increase diversification, some other strategies we like include the Blackrock Frontiers Trust and the JP Morgan Global Emerging Markets Income Trust. As investment trusts, they can help overcome liquidity issues associated with emerging market equities. Another attractive offering from JP Morgan is their Emerging Markets Opportunities fund, which offers a high beta play on emerging markets. As we would expect, it has underperformed in the recent market sell-off, but its upside capture is excellent.
As emerging markets remain vulnerable to events in developed economies, evidenced by the most recent dramatic sell-off, many investors have been deterred from investing in the region. However, as we have seen above, there remain good relative opportunities for investors who look in the right places and have a longer-term view.
Caspar Rock is chief investor officer at Architas