First State emerging markets funds forced out of sector

The IMA has kicked three First State funds out of the IMA Global Emerging Markets sector for failing to meet the sector requirements.

From December 1 the First State Global Emerging Markets, First State Global Emerging Market Leaders and First State Global Emerging Markets Sustainability funds will all be classified in the IMA Specialist sector.

The funds have been removed from the Global Emerging Markets (Gem) sector for failing to meet the sector requirement to be 80 per cent invested in stocks domiciled in emerging markets.

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Instead, the funds have, for some time, invested heavily in developed market stocks that derive more than 50 per cent of their revenue from emerging markets.

The process has been highly successful for the team, which includes Jonathan Asante and David Gait, and the funds are among the best performing in the sector in one, three, five and 10 years.

However, the success has led to huge inflows and all three funds have been ‘soft-closed’ by First State, by implementing a high initial charge, in order to discourage new investment.

Stuart Paul, managing partner at First State Stewart, said in a letter to shareholders that the funds had not met the sector requirement “for a few years”.

He explained that not only do the First State funds “own stocks listed outside Gem, but that they also “hold relatively high cash balances at present, fearing that many companies of sufficient quality are too expensive”.

Mr Paul said First State had been in discussions with the IMA about the possibility of the trade body broadening their definition of an emerging market stock but had been “largely unsuccessful”.

Faced with a choice of changing their investment process or moving out of the sector, Mr Paul said the firm had opted to move its funds out of the sector.

Mr Paul said the change in IMA sector would not affect the way the funds are run and that he thought “the impact to investors is limited”.

He said: “Whilst the Funds may no longer be classified as Gem funds by the IMA, it will of course be easy to compare the Funds’ performance to the peer group and the index, and we intend to help clients to do this in future.

“We hope that clients trust that we are doing this for the right reasons – namely giving us the best chance of making acceptable investment returns over the years and hopefully decades to come.”