Fund Review: Aviva Investors Emerging Markets Equity Income fund

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Fund Review: Emerging Markets Income

Since June 2012, Will Ballard has been managing this $710m (£463m) fund that invests “in companies that have high and sustainable returns”, he says.

“For us, when it comes to emerging markets, one of the proofs of those returns being high [and] being sustainable is that the company has decent corporate governance through a dividend yield.”

He asserts that selecting holdings on this basis is proof the companies are looking after their minority shareholders’ interests.

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The emphasis he places on corporate governance ensures he is not simply chasing companies with high dividend yields “almost for the sake of it”.

The manager points out another feature of his process is a “strong value discipline”, so he buys companies that are undervalued compared to their peers in the belief this effectively offers a “margin of safety”.

Mr Ballard explains he also “casts his net wider than normal” when seeking stocks for his portfolio.

“Most people look at the MSCI Emerging Markets index and that’s about 840 companies,” he says. “We actually include companies wherever they’re listed as long as the majority of their business is within emerging markets or their head office is within an emerging market. That gets us to around 1,600 companies.”

Whittling that number down to the 80 holdings in the portfolio involves screening. He explains: “A lot of our idea generation actually comes from our screens – companies that fit our basic definition of what are good companies. Where macroeconomic factors come in is in analysing and understanding those companies and understanding their prospects.”

The volatile nature of emerging markets is reflected in the fund’s risk-reward profile. It is at level six on the scale of seven, while its ‘clean’ A accumulation US$ share class has ongoing charges of 2.08 per cent.

The performance of emerging market funds has suffered recently and Mr Ballard’s portfolio is no exception. Data from FE Analytics shows in the past 12 months to October 9, the manager has protected against some of the downside in these regions, with the fund falling 7.6 per cent compared to the MSCI Emerging Market index’s 8.57 per cent decline. But over five years, it has lost more than its benchmark, posting a 16.7 per cent loss against the index’s 7.6 per cent fall.

He admits being “slightly disappointed” the fund has not performed better, but offers some explanation. “Periods when growth is lacklustre or when growth is in line, we tend to do a little bit better,” he observes. “But if the markets have a growth surprise or there’s a very strong rally, because of our greater stability [and] longer time horizon, we tend to underperform and that’s been very consistent throughout the history of this fund.”

Of its recent underperformance, he believes: “What’s let us down are areas where we thought there was going to be more reform… where the regulatory environment or where the government environment might change and work in [the companies’] favour.”