The best emerging-markets funds and trusts  

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The best emerging-markets funds and trusts  

Emerging markets are in recovery mode. Nick Sudbury looks at some of the best ways to gain exposure via funds and trusts.

2018 was a difficult year for emerging markets, but the prospect of lower US interest rates and a less severe downturn in global growth has brought about a decent recovery in the first half of 2019.The region has some attractive valuations and could generate strong returns, especially if the US-China trade war is resolved satisfactorily.

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Last year was the worst for global equities since the 2008 financial crisis, with emerging markets the first to feel the pain. The region was badly affected by the impact of slowing growth in China − which was partly due to the US-China trade war − and tighter global liquidity, as a result of the increase in US interest rates. This was particularly problematic for those countries with large current-account deficits or significant dollar-denominated borrowings. 

The MSCI Emerging Markets index fell by 14.5% in local-currency terms last year, significantly underperforming the loss of 8.7% recorded by MSCI World. In the first six months of 2019, it recovered by 10.6%, which was well behind the 17% achieved by its global equivalent.

Using traditional metrics, the region looks attractively valued.The main MSCI Emerging Markets benchmark is yielding 2.8%, and trading on a forward P/E ratio of 12.1 and a price-to-book ratio of 1.6, all of which are much cheaper than the comparable figures for MSCI World.

“The fundamentals of emerging markets remain attractive as do the valuations, which are still at levels that have historically indicated good long-term returns over the subsequent 10 years,” notes Adrian Lowcock, head of personal investing at Willis Owen.

Tough call

The year-to-date recovery is mainly a result of a more dovish monetary policy in the US and the eurozone. This has suppressed the returns in these areas and encouraged people to seek better gains in higher-risk areas like emerging markets, as evidenced by the large investor inflows.

Another key factor is the renewed confidence in the stability of global growth, particularly as regards the US and China. These two economies are by far and away the most important markets for goods and services in the region.

Ryan Hughes, head of active portfolios at platform provider AJ Bell, says that the key attraction of investing in emerging markets is the ability to gain access to the most dynamic and fastest- growing economies across the world.


“In aggregate, all of the countries classified as emerging are growing significantly faster than their developed counterparts and given the changing structure of these economies, it is a trend that looks likely to persist on a multi-year basis. The key to this is China, which has seen phenomenal growth, with a GDP rate that developed countries such as the UK can only dream of.”

If the supportive macro environment continues it should help to drive returns across emerging markets, but it’s obviously a highly fluid situation that could reverse very quickly. It would only take a global economic slowdown, an escalation of trade tensions or higher-than-expected US interest rates to spark a potentially severe reversal.

“With tariffs being levied on a tit-for-tat basis, there is a danger that this could stall the growth rates in certain parts of the world, particularly as the US looks to be more protectionist. There are also the ever-present issues of government interference, weak corporate governance and a less stable macro-political environment,” warns Hughes.

Top picks

If you are optimistic about the prospects and comfortable with the inevitable volatility, then the most practical way to invest would be to use one of the specialist funds that concentrate on the region.

According to data from FE Trustnet, there are 105 open-ended funds in the IA Global Emerging Markets sector and over the last five years they have returned an average of 49.4%. The top performers were: Vontobel mtx Sustainable Emerging Markets Leaders (107.7%), Hermes Global Emerging Markets (89.7%) and Baillie Gifford Emerging Markets Growth (83.3%).

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Lowcock recommends the JPM Emerging Markets fund. He believes that manager Leon Eidelman makes good use of the analysts within the firm’s extensive Emerging Markets and Asia-Pacific team, assessing their best ideas and challenging assumptions to build his own conviction.

“He takes a long-term, stock-picking approach and focuses on quality, growth firms. The fund has also had a persistent bias towards sectors positively affected by domestic demand and consumption, rather than areas influenced by commodity prices and currency moves.”

Over the last 10 years it has generated an annualised return of 9% versus the 7.7% achieved by its MSCI Emerging Markets benchmark. The fund is a decent size with assets under management of almost £1.4bn, although the ongoing charges of 1.15% makes it more expensive than some of its peers.

For those who want a slightly lower-octane option, Hughes suggests its stablemate, the JP Morgan Emerging Markets Income fund. This focuses on companies that have the ability to grow their dividends over time, and as a result has exposure to businesses that could be considered high quality.

“Fund manager Omar Negyal has been running the fund for seven years and is backed by a large team of analysts to help with idea generation. While this type of approach will typically lag in rapidly rising markets, it often comes into its own when things become more challenging.”

The £373m fund is yielding 3.8%, and since it was launched in July 2012, has generated an annualised return of 7% per annum, which is in-line with its benchmark.

The best investment trusts

Data from Winterflood Securities reveals that there are nine investment trusts operating in the Global Emerging Markets sector. These have generated an average five-year total share price return of 56% and are trading on an average discount to net asset value (NAV) of 7.8%. The two largest are Templeton Emerging Markets (LON:TEM), with total assets of £2.3bn, and JPM Emerging Markets (LON:JMG), with £1.3bn.

The investment-trust analysts at Numis and Winterflood both recommend the latter as a core buy. It was launched in 1991, and since 1994, has been managed by Austin Forey, who has delivered strong long-term relative returns for investors.

Forey looks for quality, growth companies that are trading at reasonable valuations and takes into account both the fundamental analysis of the business and the wider macroeconomic perspective. He adopts a long-term approach and runs his winners, which helps to keep the turnover and trading costs low.


At the end of May, JPM Emerging Markets held a 58-stock portfolio with the top 10 positions accounting for 45% of the assets. The two largest country weightings were China and India, with each making up just over a fifth of the allocation. Over the last five years, the shares have returned 98%, which is well ahead of the benchmark and peer group, yet they are trading on a 7% discount to NAV.

Numis also recommend the £102m Mobius Investment Trust (LON:MMIT), which began trading last October. It is completely different from anything else in the sector as it invests in a concentrated portfolio of 20-30 small-to-mid-cap stocks in emerging and frontier markets, and has an absolute return focus. The plan is for the managers to work with the companies to help unlock the value.

MMIT has a strong management team that includes Mark Mobius and Carlos Hardenberg, who were both formerly responsible for running the Templeton Emerging Markets investment trust. By the end of May, they had invested 77% of the cash raised at the IPO in 20 companies spread across 11 different countries. It is also worth noting that they have significant personal stakes in the fund, which makes them highly motivated to succeed. 

The single country route

Investing in a single country emerging market fund carries a much higher level of risk than one of the more diversified regional alternatives, but also has the potential to deliver better returns.

A good example is Fidelity China Special Situations (LON:FCSS), which has been managed by Dale Nicholls since he took over from Anthony Bolton in April 2014. Nicholls mainly focuses on companies operating in the ’new economy’ sectors, which are set to benefit from the growth in the middle class, rising incomes and increasing penetration of the internet and e-commerce.

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The manager believes that China will reach an agreement with the US because of the mutual damage that a prolonged trade war would bring to both economies. Numis rates him highly and point out that he has comfortably outperformed his benchmark since taking over the fund. Over the last five years the shares have returned 128% and they are currently trading on a discount to NAV of 8%.

Numis also likes JPMorgan Indian (LON:JII). India’s incumbent Prime Minister, Narendra Modi, has recently won a landslide election victory, securing another five-year term for the ruling BJP. The fund’s managers, Rukhshad Shroff and Raj Nair, believe that the result will be helpful for the local stock market as it means that his business-friendly policies are set to continue.

JPMorgan Indian focuses on high-quality growth franchises and is positioned for a recovery in domestic earnings, while having an underweight exposure to sectors sensitive to the global economy (IT services and energy), as well as consumer staples, which are more defensive and typically trading on high multiples. It is by far the largest and most liquid London-listed Indian equity investment trust with total assets of £930m and competitive ongoing charges of 1.09%. Over the last five years the shares have returned 93% and they are currently trading on a discount to NAV of 9%. 

Another favoured market is Vietnam where Numis has trading buy recommendations on both Vietnam Enterprise (LON:VEIL) and VinaCapital Vietnam Opportunity (LON:VOF). It says that the key drivers for the country are: healthy economic growth, strong foreign direct investment and the government’s privatisation programme, all of which leads it to conclude that investors should have exposure over the next few years.

 VOF has returned 145% in the last five years, yet the shares are currently trading on a 15% discount. VEIL was only launched in July 2016, but has done pretty well and again the shares are available on a wide 14% discount. Both are likely to be highly volatile and they are also expensive with ongoing charges of 2.39% and 3.01%, respectively.

FUND OF THE MONTH

The safest way to gain exposure to the region would be to use one of the diversified regional funds, with a prime example being the £2.3bn Fidelity Emerging Markets, which has been managed by Nick Price for almost a decade. It has been a first-quartile performer over the last five years, with an annualised return of 9% per annum versus the 7.6% achieved by its benchmark.

Price focuses on companies which offer quality growth and display a superior and sustainable return on assets. He has put together a 62-stock portfolio with the main country overweight positions relative to the MSCI Index being Hong Kong, Russia and India. The chief areas where he is underweight are mainland China and South Korea.

Lowcock, who recommends the fund, says that the investment process is based on a deep analysis of each company and its accounts. “Price looks for strong, unleveraged balance sheets, shareholder-friendly management and reasonable valuations. He then actively manages it as a best-of-breed portfolio, topping up or trimming holdings based on his price targets and technical analysis.”

Hughes, who also likes the fund, says that theportfolio is well diversified to mitigate some of the stock-specific risks that exist when investing in emerging markets. “There are limits on the stock and sector positions to give a further layer of risk mitigation, although this still gives the manager significant flexibility to focus on companies that can really add value.”

Fund facts

Name: Fidelity Emerging Markets
Type: OEIC
Sector: Global Emerging Markets
Total assets: £2.3bn
Launch date: May 2013
Historic yield: 0%
Ongoing charges: 0.96%
Website: www.fidelityinternational.com

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