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FE Adviser Fund Index

By Shaun Cumming

The growth of emerging market debt and equity funds run by institutional firms over the past decade has led to a boom as groups in the retail arena scramble to launch me-too products.

This quiet expansion has turned into a boom during the past year as firms in the retail arena scramble to launch similar products after strong performance by the institutional funds that led the way.

Somerset Capital Management, which operates the equity income-mandated Somerset emerging dividend growth fund, is one specialist manager in the field. Ashmore, which has several emerging market debt funds, is another.

But there are questions over whether the Uk retail market is ready for them.

Somerset founding partner and head of European marketing Oliver Crawley earlier this year pointed to Brazil as a particularly interesting emerging market for debt investors. He said: “In Brazil, it is mandated in law almost that every company must pay out a minimum of 25 per cent of its net profits as dividends. In terms of the emerging dividend growth fund, this is quite an attractive proposition.”

But he pointed to the many traps as well, showing why it is important that each market is studied. For example, companies in India do not traditionally pay dividends.

Ashmore is not worried by competition and considers that increased interest in emerging market debt will help liquidity in the asset class.

Fund analysts recognise the firms that have made their mark in the area with good track records. Fundscape director and author of the quarterly Pridham Report on funds Helen Pridham says investor demand ultimately rewards good performance.

She says: “There is investor demand for these products. Investec emerging market local currency debt fund, the first of its type launched in the UK, has been very popular.
It yields 6 per cent, which is an attractive yield, especially considering the fact that some of the emerging markets have better credit ratings than the West.

“Investors see these debt funds as a way of diversifying their bond portfolios and a lower-risk way of gaining exposure to the emerging markets than via the equity route.”

There is often scepticism of groups that join a me-too rush and Rowan Dartington head of collectives research and FE AFI panellist Tim Cockerill suggests points to consider.

He says: “Fund managers are increasingly launching emerging market debt funds and doing very well with them. If they get it right, they need to have little fan-fare at launch and slowly build up a track record, then they have potential to attract a lot of investors.”

He sees Investec and Legg Mason as having successful track records in the area.

Cockerill adds: “The market is getting bigger and bigger but I have a question about performance. These funds are operating in debt markets while the countries’ currencies are consistently appreciating. Could this be a big part of the success? We will need to see how this adjusts in future.”

Data supplied by FE


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