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Fund Review: Emerging Markets Income


Collecting dividends in emerging markets has certainly been a challenge this year, mainly due to the extreme volatility experienced by markets over the summer and an oil price which has plunged and looks likely to remain low.

According to data from FE Analytics, the MSCI Emerging Markets High Dividend Yield index is down 10.5 per cent in the 12 months to October 9, while the MSCI Emerging Markets index saw a less steep 7.8 per cent drop, falls that reflect the ongoing headwinds facing this asset class.

Will Ballard, manager of the Aviva Investors Emerging Markets Equity Income fund, acknowledges: “Without a doubt, countries within emerging markets are exposed to greater volatility than developed markets. You only need to look at what’s going on this year… and the back end of last year, and you can see that investing in emerging markets is not without its pitfalls.

“Because of that, you need to find the right companies, the ones that can survive that sort of volatility.”

Figures from the latest Henderson Global Dividend Index report reveal emerging market dividends fell 1.1 per cent on a headline basis to $30.7bn (£20bn) in the second quarter of 2015. However, a breakdown of annual dividends by region shows emerging markets not far behind the UK in terms of payouts last year, which will come as a surprise to many. Emerging market dividends totalled $115.4bn in 2014, while the UK total was $136.5bn.

But the report also cites the “dividend variability” that is common in these less developed markets, with Russia-based firms in particular exhibiting this erraticism. The Henderson report states Russia has an “unpredictable dividend market”, with the most recent figures underscoring this.

“Having almost contributed nothing in Q2 2014, [Russia] was the largest contributor in Q2 2015, delivering $3.9bn, mainly as a result of Norilsk Nickel and Rosneft making large payments,” the report authors state.

However, South Africa saw “modest” underlying growth in dividends in the second quarter of 2015, up 3.4 per cent, while in Turkey, mobile phone operator Turkcell restarted dividend payments – “good news for investors”, Henderson notes.

Mr Ballard suggests: “If you look at the returns from emerging markets over pretty much any period, the return from the dividend yield… has actually been more than that of the capital appreciation. I know emerging markets have been weak but if you go back 25 years, dividends have contributed more than 50 per cent of the total returns of emerging markets, and that’s despite having been through a commodities supercycle.”

Dividends may have taken a hit, but adopting a long-term view should reassure investors in emerging markets that there is still income to be found in the asset class.


Standard Life Global Emerging Markets Equity Income

Mark Vincent, who has been running the £332m fund since its launch in December 2012, seeks to provide income and capital growth. But his 14.8 per cent allocation to China may have hurt recent performance. The fund made a 10.7 per cent loss in the 12 months to October 9, according to data from FE Analytics. The portfolio’s largest sector weighting is to financials at 26.8 per cent, while its exposure to the volatile energy sector is much smaller at 7.3 per cent.

UBS Emerging Markets Equity Income

This fund is relatively small at £47m in size, having launched in January 2011. It has a fairly concentrated portfolio of 49 holdings, selected by co-managers Projit Chatterjee and Urs Antonioli. FE Analytics data reveals the fund lost 11.8 per cent in the 12 months to October 9, in line with other emerging market income funds. Taiwan is the largest country allocation, accounting for 18.4 per cent of the portfolio, while China makes up 14.9 per cent.


JPM Emerging Markets Income

Omar Negyal, Richard Titherington and Amit Mehta co-manage this £252m fund, which invests in high dividend-paying emerging market companies. The portfolio’s biggest weighting is to Taiwan at 22.3 per cent, followed by a 16.7 per cent exposure to China and 13.7 per cent in South Africa. Financials is the largest sector in the fund at 24.3 per cent, although only two of the top 10 holdings sit in this sector – Banco Santander and PZU. Over three years to October 9, the fund has lost 4.4 per cent, demonstrating that its managers have been able to protect on the downside while some of their peers have suffered bigger losses.

In this special report