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Sector focus: Signs of fortune for Global Emerging Markets?

Illustration: Alex Williams

The road to recovery

A tricky sector to perfect, could emerging markets be the place to invest in 2019?

Emerging markets can be a rather complex space. It can cover a vast variety of countries, markets and sectors. Despite this, investors remain keen. As of November 2018, the Global Emerging Markets sector had £24.8bn in funds under management and net retail sales for the month reached £59.3m during global market turbulence.

The sector remains popular with Isa investors, with £6.9m flowing into savings during the same month.

The IA sector itself is broad; funds must invest 80 per cent or more of their assets in equities from emerging markets, as defined by the relevant FTSE or MSCI emerging markets and frontier indices.

The maximum any fund can have at one time in frontiers to be eligible for the sector is 20 per cent; funds which invest solely in frontier markets or regional emerging markets (for example, emerging Europe) are included in the IA Specialist sector.

It should also be noted that funds which hold shares of companies whose business is predominantly based in emerging markets but are listed on exchanges in developed markets are not eligible to be included as core assets (i.e. the 80 per cent), but can be held as non-core assets (the remaining 20 per cent).

The countries covered in the MSCI indices show there are some large economies still classified as “emerging”. China, for example, is the world’s largest economy but remains firmly classed as an emerging market, amounting to 30.4 per cent of the index.

Meanwhile, Greece was the first developed country to be downgraded in 2013 amid its economic crisis.

South Korea (13.8 per cent), Taiwan (11.4 per cent), India (9.4 per cent) and Brazil (7.5 per cent) make up the majority of the rest of the index country weightings.

Macro overview
When looking at the bigger picture, many markets have hit the headlines in recent months. A prime example is China, which has been in a mounting trade war with the US.

The trade war has not just affected the two countries involved, with tensions having a ripple effect around the globe.

South Korea is an export-heavy economy and has had a difficult year, with shipments continuing to slide due to the trade war.

Its trade ministry said exports had fallen 5.8 per cent year-on-year, the sharpest decline in two and a half years. Korean exports to China have dropped by 19.1 per cent over the same period. Argentina’s economy has also been suffering over the past 12 months. Interest rates hit 72 per cent in October, while the country’s inflation forecast reached 47.5 per cent.

Despite uncertainty across a multitude of countries, managers are finding value around the globe and many have seen solid returns.

The past 12 months have clearly been tough in terms of finding value and growth. The IA sector has not seen great performance over the year, on average witnessing a -11.29 per cent fall, according to FE. In fact, just one fund out of its 106 constituents saw a positive return, the Lazard Mena fund, which returned 5.56 per cent over a 12-month period. However, looking over a longer-term period, starting with three years, fund performance tells a different story. No funds in the sector lost money, with the best returners doubling or near-doubling their money.

The funds in focus section below looks at the top performers over a five-year period.

With the Chinese year of the pig arriving this week, the zodiac animal is supposed to bring signs of fortune.

However, the last time a pig year rolled around was 2007, and what came next for many across the globe did not end in great fortune.

Funds in focus: Finding the hidden GEMs

The sector has been under a lot of pressure in the past 12 months, but looking at a longer-term horizon, many funds have witnessed strong and solid returns. Here is a selection of the top performers in the space.

JPM Emerging Markets Small Cap

  • Performance over 5 years: 85.29%
  • Fund size: £1.22bn
  • Managers: Amit Mehta and Austin Forey
  • Launch date: November 2007
  • Benchmark: MSCI Emerging Markets SMID
  • Breakdown:
    Pacific Basin 43.10%
    Asia Pacific 15.50%
    Americas 13.60%
    Europe ex-UK 11.40%
    South Africa 9.50%
  • About: This fund is predominantly Asia-focused, with many stocks held in China, Taiwan and Korea. The portfolio has 97 equity holdings and its top holding is Lojas Renner, the largest department store in Brazil. The fund aims to achieve its long-term capital growth by investing in small-cap companies. Almost 65 per cent of the fund is invested in companies with a market cap of between $1bn and $5bn (£766m and £3.8bn). Using a bottom-up approach, the managers look for high-conviction stocks with sustainable growth potential.

Hermes Global Emerging Markets

  • Performance over 5 years: 85.12%
  • Fund size: £2.76bn
  • Managers: Gary Greenberg and Kunjal Gala
  • Launch date: December 2008
  • Benchmark: MSCI Emerging Markets
  • Breakdown:
    Asia 73.70%
    Middle East/Africa 14.16%
    Americas 11.59%
    Money Market 0.55%
  • About: This fund aims to have a diversified portfolio, although the majority of it lies within Asia. China makes up 35 per cent of the fund, with its largest holding being Tencent, a Chinese internet-based firm specialising in entertainment, artificial intelligence and technology. The portfolio is made up with a heavy weighting to financials (25.9 per cent) and information technology (20.5 per cent), both overweight the benchmark.

UBS Global Emerging Markets Equity

  • Performance over 5 years: 81.26%
  • Fund size: £730.7m
  • Manager: Urs Antonioli
  • Launch date: August 2012
  • Benchmark: FTSE All World Emerging Index
  • Breakdown:
    Pacific Basin 51.10%
    Americas 14.90%
    Asia Pacific 12.40%
    Europe ex-UK 8.60%
    South Africa 8.00%
  • About: Another fund with a heavy weighting in China (37 per cent), this one looks to achieve long-term capital through a diversified portfolio. Financials make up a key part of the fund and the manager cites Itau, a Brazilian bank, as one of its highest contributors to performance in the final quarter of 2018. HDFC Bank in India and Mandiri in Indonesia also helped recovery from a tough year.

Aviva Investors Emerging Equity MoM 1

  • Performance over 5 years: 78.26%
  • Fund size: £70.5m
  • Manager: Emerging team
  • Launch date: April 2005
  • Benchmark: MSCI Emerging Markets
  • Breakdown:
    Americas 36.45%
    Pacific Basin 34.47%
    South Africa 8.54%
    Asia Pacific 7.39%
    Europe ex-UK 5.90%
  • About: The fund aims for long-term growth, which it regards as five years or more, investing in a range of companies in the emerging markets space. It also has its top holding in Tencent, while additionally favouring technology stocks including Taiwan Semiconductor, Alibaba – a Chinese stock specialising in e-commerce and technology – and household electronics name Samsung.

Baillie Gifford Emerging Markets Growth

  • Performance over 5 years: 77.76%
  • Fund size: £835m
  • Managers: Richard Sneller and Mike Gush
  • Launch date: December 1999
  • Benchmark: MSCI Emerging Markets
  • Breakdown:
    Pacific Basin 56.10%
    Asia Pacific 14.40%
    Americas 14.20%
    Europe ex-UK 7.50%
    International 6.60%
  • About: This fund aims to invest in an actively-managed portfolio investing on a five-year perspective and has a strong growth preference when stock picking. The managers state they look for “significant upside” in each stock and are driven by a bottom-up analysis. The portfolio typically holds between 60 and 100 stocks. More than half the fund is made up of stocks from China, India and South Korea, with the top holdings being heavily derived from technology and financial names, such as Tencent, Samsung, Alibaba and Ping An Insurance.

T. Rowe Price Emerging Markets Equity

  • Performance over 5 years: 76.20%
  • Fund size: £1.55bn
  • Manager: Gonzalo Pangaro
  • Launch date: September 2013
  • Benchmark: MSCI Emerging Markets
  • Breakdown:
    Pacific Basin 55.41%
    Americas 18.13%
    South Africa 7.48%
    Asia Pacific 6.74%
    Europe ex-UK 5.81%
  • About: This fund focuses on investing in high-quality companies across the global emerging market universe. While the fund’s highest country allocation is China, it is also overweight Brazil, South Africa and Hong Kong. The managers also publish a list of “risks” that they deem materially relevant to the fund. Currently, China and Saudi Arabia are on the list, as well as tensions between Russia and Ukraine. Consumer staples is its highest overweight sector, followed by financials.

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