Investors in emerging market (EM) funds have suffered a torrid 2018, with the MSCI Emerging Markets index down 4.6 per cent even as many other parts of the world are in the throes of a bull market, but some EM fund managers have weathered the storm better than others.
Concerns about Turkey, slowing growth in China, and the impact of higher US interest rates are combining to dent sentiment towards emerging markets.
But not all emerging markets are created equal, said Ernst Knacke, fund research analyst at Quilter Cheviot, as he picked two particular funds which have done well.
He said: "Emerging markets have been making the headlines recently. Concerns have focussed on Turkey, where the authorities appear poorly placed to deal with external pressures on the economy alongside high levels of external debt, a collapsing currency and soaring inflation.
"But as investors consider the broader implications for emerging markets, they should also remember that this is a very diverse investment space and that not all markets are created equal, even within the emerging world."
One of the funds to have performed well during the turbulence, according to Mr Knacke, was the £2.5bn Stewart Investors Global Emerging Markets Leaders fund which is run by Ashish Swarup and Tom Prew.
Mr Knacke said: "This Stewart Investors fund provides exposure to high quality, market leading large capitalisation companies in emerging markets.
"Lead manager Ashish Swarup and the team at Stewart have a very clear philosophy focussed on quality, governance and stewardship.
"While their benchmark agnostic, bottom-up approach means they can deviate significantly from the index for long periods of time, they have an exceptional long-term track record of creating value, especially in uncertain and difficult market environments."
He said the fund had a difficult 2016 and 2017, partly due to the style of investing being out of favour.
But he said the fund had seen strong performance in recent months, driven by its exposure to India combined with strong stock selection broadly.
"This comes despite some headwinds in South Africa – a major market for them – and even with a 2 per cent allocation to Turkey, including recent purchases," Mr Knacke said.
Next, he nominated the £531m Janus Henderson Global Emerging Markets Opportunities fund, managed by Glen Finega.
He said: "The Henderson Emerging Markets fund also has a bias towards quality, inevitable given lead manager Glen Finegan spent his first 18 years at Stewart Investors.
"As with the Stewart approach, Glen and his team generally avoid state owned enterprises, often large index constituents in many less developed countries.
"They also have a tendency to have limited exposure to countries where the underlying regimes do not promote the rule of law and shareholder rights and remain uncomfortable with shareholder rights in US listed ADRs, a common structure for many Chinese Internet companies."
Mr Knacke said even though the fund is likely to "deviate significantly" from the index over time, he appreciated the fund’s "rigorous stock selection process and focus on capital preservation".
He said: "The fund has outperformed its main EM index in recent weeks, though this hasn’t been without issue.
"An overweight position in Indian equities and underweight in China helped, though this was offset by some stock specific issues in South Africa. We maintain our conviction in the fund, however, and believe that it will continue to perform strongly during market downturns."
david.thorpe@ft.com
