There has been much ink spilt extolling the virtues of emerging markets during the past decade or so and we remain believers in the long-term story as they continue to drive global growth.
It is generally agreed among investors that, when investing within emerging markets, active management is most necessary and effective due to the market inefficiencies and the diverse nature of markets. However, we have observed a curious trend of late.
In spite of the sheer number of stocks, sectors and countries, the amount of funds consistently outperforming the benchmark is few. In five years, the benchmark return would actually place in the first quarter of the Lipper Global Emerging Market index in this period; meaning that only 28 out of the 134 fund universe managed to outperform the MSCI Emerging Markets (Total Return US dollar) benchmark.
Perhaps this helps explain the otherwise surprising strong performance from quant-driven managers like Arrowstreet, Robeco and Reyl within the emerging markets space.
Although they may be harder to find, quality managers do exist within emerging markets. Our experience and research within emerging markets has unearthed a number of high quality emerging market funds beyond the established managers.
Of the active managers, the more defensively positioned have tended to perform well. In line with rising middle classes, consumer companies, both discretionary and staples, have offered impressive returns as well. This theme, along with a broader desire from investors to seek out yield, has led to huge flows into income stocks which have in turn driven yields down.
We have benefited greatly in absolute and relative terms from our holding in the bottom-up driven Somerset GEM Emerging Dividend Growth fund.
However, investors should be cautious of investing in emerging markets based purely on yield.
It has been the more cyclically orientated stocks that have struggled which have led many experts to comment on the apparent richness of the defensive companies – the so-called expensive defensives.
In contrast to the stockpicking approach, there are managers who adopt a more top-down approach to investing in emerging markets.
This is not an easy task but managers such as Fisher and Carmignac have proven their worth in this area of the market.
Investors should not be fooled by the standard argument trotted out in active versus passive debates, which holds that active management is more effective in the inefficient emerging markets as opposed to the large and efficient developed markets.
Things are not as clear cut as this and good emerging market managers are a valuable commodity. Through our rigorous process, we have identified a number of skilled emerging market managers, all with very different and complementary styles.
By then blending them together we aim to create well-balanced and diversified portfolios, capable of delivering consistent and attractive risk-adjusted returns.
Graham Duce is co-head of Aberdeen multi-manager funds
