The Sarasin IE Emerging Markets Systematic fund is a Dublin-based unit trust designed as a low-cost way to tap into a diverse range of emerging markets where economic growth is higher than developed markets.
But instead of having a high weighting towards the BRICs, this fund spreads risk evenly across 19 countries from the MSCI Emerging Markets index. This approach gives the fund greater diversification than the index itself, 64 per cent of which is weighted towards five countries: China, South Korea, Taiwan, Brazil and South Africa.
Sarasin said its investment strategy would give it more exposure to small dynamic economies that have historically outperformed larger countries.
The fund will gain its exposure by using unfunded swaps executed by several major investment banks. This will mean the fund does not do any stock picking, which Sarasin said will “remove subjectivity and manager risk from the investment process and avoid liquidity issues that can arise with some stocks”.
Minimum investment is £1,000. Annual charge is 1.5 per cent for retail A shares and 0.65 per cent for platform P share class.
It is common to see swap-based portfolios in exchange-traded funds (ETFs), but to find it in a unit trust may seem peculiar. A swap is a type of derivative and they are either funded or unfunded. In this case, Sarasin is employing unfunded swaps that allow the fund manager to use investor cash to buy securities that will make up the fund’s holdings. This means the manager owns the assets, whereas in a funded swap the cash is transferred to the counterparty, which then puts up collateral in a segregated account.
The benefit of using a swap-based structure lies in matching the return of the underlying securities. This is more significant in an ETF that tracks an index and wants to avoid tracking error, whereas in this case Sarasin said the intention is to eliminate subjectivity in the investment process.
But such a strategy also means losing the benefits of active management. If an investor wants to tap a manager’s expertise when it comes to investing in successful companies that have the potential to generate strong performance, this is not the fund for them. What this fund does do, however, is avoid the liquidity issues that can afflict companies in less popular markets, which can be a problem if a fund becomes too large or markets take a bad turn.