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Fund Review: Emerging markets


Over the past 10 years, the sector outperformed the developed markets by some way and was on a growth trajectory that showed few signs of slowing.

Data from FE Analytics shows that in the 10 years to December 2 2014, the MSCI Emerging Markets index was a top performer, delivering an extraordinary 195.18 per cent to investors. Over the same period the S&P 500 returned a notable 147.01 per cent, while the MSCI World index generated a return of 129.57 per cent. Meanwhile, FTSE 100 lagged all these indices with a 104.02 per cent return to investors.

But data for the past 12 months to December 2 tells an entirely different story for the MSCI Emerging Markets index: it now lags all three indices, returning a disappointing 4.03 per cent.

This recent underperformance may be just a blip, but there are concerns the sector’s poorer results could be symptomatic of longer-term issues.

China’s slowing growth has been well documented, with many taking the view it is unlikely to return to previous levels.

Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management, points out the economic slowdown in emerging markets began in 2010, with emerging equity markets underperforming developed markets ever since.

Mr Bakkum warns: “The growth problem in emerging markets has long been underestimated. It has now become clear the problems are structural [and] only reforms can ensure a sustainable recovery.”

He continues: “Both the lower growth in world trade (especially the much lower Chinese growth rate) and the declining capital inflows (because of the gradual normalisation of US monetary policy) are negative factors that will not disappear in the coming years.

“Meanwhile, there are also clear, specific reasons why growth should continue to fall: an increasing dependence on credit, a weakened competitiveness and a deteriorating investment climate.”

China is not the only emerging market to have suffered a slowdown though, as Schroders emerging markets economist Craig Botham notes Indian GDP expanded 5.3 per cent year on year in the third quarter of 2014, less than the 5.7 per cent growth in the second quarter of the year.

In the third quarter, Brazil’s GDP actually contracted 0.2 per cent year on year, although this was down from the 0.9 per cent contraction recorded in the previous three months.

In his outlook for next year, Mr Botham predicts: “Weaker oil spells problems for Russia but should help keep inflation low elsewhere, while also providing some growth tailwinds to energy importers like India.

“Meanwhile, China will continue to slow, in spite of recent stimulus efforts.”

Alex Tedder, head of global equities at Schroders, adds: “India is the only bright spot in emerging markets: it has an exciting investment story, with exceptional demographics and a vibrant private sector.”

Ellie Duncan is deputy features editor at Investment Adviser


First State Global Emerging Markets Leaders

This £3.3bn fund from First State is run by Jonathan Asante and Tom Prew, who have a remit to invest in large- and mid-sized companies predominantly based in emerging markets. Since its launch in December 2003, the fund has delivered top-quartile returns over one, three, five and 10 years. According to FE Analytics, in the 10 years to December 3 it has returned 317.34 per cent, compared to the IMA Global Emerging Markets sector average of 182.46 per cent, placing it second in the sector over that period. It has a 34.9 per cent weighting to consumer staples, followed by financials at 21.2 per cent of the portfolio.

Lazard Emerging Markets

Launched in May 1997, this £904.5m fund has built up a track record of outperformance, ensuring it is top quartile in the IMA Global Emerging Markets sector over five and 10 years. James Donald runs a portfolio that aims to achieve long-term capital growth through investing in companies with significant interests in emerging markets. It has returned a respectable 234.53 per cent in the 10 years to December 3, and 29.93 per cent over the past five years, according to FE Analytics. Banco do Brasil, Taiwan Semiconductor Manufacturing and China Construction Bank are the top-three holdings in the portfolio.


Aberdeen Global Emerging Markets Smaller Companies

For those investors who want exposure to smaller companies in the emerging markets, this $2.1bn (£1.3bn) fund, which is managed by a global equity team, has clocked up several years of strong performance. FE Analytics shows that in the five years to December 3 the fund generated a 71.90 per cent return for investors, against the 18.16 per cent average of the IMA sector over that period. Among its top-10 holdings are Mexico-based Aeroportuario del Centro Norte and Çimsa Çimento in Turkey.

In this special report