Investment insight: Global Emerging Markets

This past summer saw major sell-offs in numerous emerging market currencies. Currencies such as the Thai baht, Mexican peso, Indian rupee and Malaysian ringgit all suffered corrections. The sell-offs were not confined to one area but spread from South America to Asia.

The US dollar continued to climb against the emerging market currencies, with many fund managers choosing to buy emerging market debt rather than stocks in the countries themselves.

India’s currency, for example, fell to a record low of 68.8 rupees to the dollar in August – following a drop of 4 per cent in one week – despite the Reserve Bank of India’s efforts to stop the slide. The bank later announced new measures to buy long-dated bonds to counter a rise in yields.

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According to JPMorgan’s Emerging Market Bond index of dollar-denominated sovereign bonds issued by a selection of emerging market currencies, they collectively fell 6.1 per cent in the second quarter of 2013, the biggest drop since 1998.

Trend spotting

Having spotted a trend among fund managers buying emerging markets bonds, the Investment Management Association (IMA) announced in August it was to create a Global Emerging Markets Bond sector, effective as of 31 December 2013.

The trade body said all funds wanting to be included in the sector would have until 31 March 2014 to comply with its new requirements, although new funds would have to comply at point of at entry.

The new sector will require all funds to invest at least 80 per cent of their assets in emerging market bonds as defined by a recognised global emerging market bond index. The IMA said funds in the sector must also be diversified by geographical area.

Emerging markets have suffered over the past three years, having relied heavily on demographic trends. The MSCI Emerging Markets index underperformed compared to the S&P 500 and FTSE 100. However, the sector’s breadth – covering countries from Latin America to Africa to Asia – means there are always new investments waiting to discovered.

Despite the negativity and underperformance, funds in the IMA Global Emerging Markets sector have been selling well over the past 12 months, except for August 2013 when there were almost £1m of outflows. It was the best-selling sector in October and December 2012 and again in January 2013, with net retail sales of £309m, £252m and £223m respectively.

The IMA stipulates that funds wanting to be in the sector must invest 80 per cent or more of their assets in emerging market equities as defined by the relevant FTSE or MSCI index.

According to the latest figures from the IMA, net retail sales in the sector reached £27m this October. Although not its highest selling month, it continues the positive trend for the year.

Fund performance

Table 1 shows the top-performing funds and investment trusts from the respective Global Emerging Market sectors ranked over five years.

The top-performing unit trust is the US$2.8bn (£1.71bn) Aberdeen Global Emerging Markets Smaller Companies fund, which returned £3,181 over five years based on an initial £1,000 investment – an annualised return of 26 per cent. The Luxembourg-domiciled Sicav fund’s highest country weightings are in Brazil, China and South Africa.