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With one month to go until the 2016 Olympics kick off in Brazil, there have been a number of reasons to get excited about emerging markets this year. Five of FundCalibre’s top 10 Elite Funds for the first half of 2016 were invested there*. And while UK equities have managed a 4.2% rise, global emerging markets are up 19.9%1 in sterling terms year-to-date.
A falling pound has helped boost returns for UK investors, but emerging markets have been supported by several other factors. A falling US dollar, as we saw earlier in the year, is always good news. This is because many emerging market governments borrow money (i.e. issue bonds) in US dollars; when the dollar falls, their debt costs them less, in local currency terms, to repay.
Emerging markets have also become ‘cheap’ after finding themselves out of favour for the past few years while investors preferred the strong growth story coming out of America and other developed markets. Prices eventually reached a point where they were low enough to tempt buyers back in and this contributed to a bit of a rally.
For UK investors who haven’t yet bought, it’s true sterling’s slide now makes global equities more expensive. Regardless, though, emerging markets do remain below their long-term average valuations in absolute terms**.
For those who want to take the plunge, here are the five Elite Rated funds that delivered the highest total returns in the six months to the end of June 2016.
Aberdeen’s emerging markets team are world renowned and the Elite Rated Aberdeen Latin American Equity fund showcases their methodical investment process. Stock selection is entirely based on fundamental research and four to five company visits are typical before an investment is made. This diligent approach is well suited to the volatile nature of emerging markets.
A 55%+ geographical allocation to Brazil*** has helped the fund’s returns this year. The start of impeachment proceedings against the country’s president Dilma Rousseff renewed investors’ enthusiasm, although the economy remains deep in recession and its path out is still unclear.
The team’s investment style of using market volatility to time buying and selling has no doubt thrown up plenty of trading opportunities this year. Led by James Donald, the team look for companies in emerging markets that they believe have the potential to become tomorrow’s leading global brands. However, they employ a strong value discipline, meaning they only buy stocks they consider reasonably priced, which has been a key contributor to their success.
Much like its benchmark MSCI Emerging Markets index, the Elite Rated Lazard Emerging Markets‘ biggest regional weighting is to emerging Asia (although it is underweight that area versus the index). While China’s slowing growth does concern investors, the fact remains it is the world’s second largest economy and still warrants a place in a diversified global portfolio. With four of its 10 largest holdings in China****, this fund’s intelligent stock selection could be a good way to gain that exposure.
Another Elite Rated Aberdeen fund made our top 10 list for the first half of 2016 and, indeed, Aberdeen Emerging Markets Equity has been the standout performer of the Investment Association’s Global Emerging Markets equity funds sector for the past 10 years*****. Unfortunately, its success has led to the fund closing to new investors, although the aforementioned Elite Rated Aberdeen Latin American Equity and the Elite Rated Aberdeen Emerging Markets Bond funds remain open.
The Elite Rated Standard Life Investments Emerging Market Debt fund offers something slightly different to the other funds on this list – it invests in bonds, as opposed to shares. This means the fund is considered lower risk than an emerging markets equity fund (although higher risk than a bond fund investing mostly in developed markets such as the US, the UK and Europe).
Manager Richard House looks first and foremost at macro economic conditions, meaning he pays a lot of attention to how things like US interest rates; economic growth, employment and inflation; and geopolitics may affect the different regions and countries in which he invests. He sets himself apart from his competitors, attending annual International Monetary Fund meetings and also travels to many of the countries in which he invests.
Fund manager Matthew Vaight’s basic mandate is to find quality companies that other managers have not, which he believes are undervalued, and hold them for the long term while they appreciate. He focuses on companies that are run for the benefit of shareholders, which is a crucial consideration in emerging markets.
For example, the fund’s second largest country weighting is in South Korea****** – a market that is renowned for its domination by state-owned enterprises and large family-owned businesses. Minority shareholders in South Korea have traditionally fared poorly and this has deterred investors from accessing what is actually one of Asia’s most ‘developed’ emerging markets. Through the Elite Rated M&G Global Emerging Markets fund, Matthew provides exposure to companies in these areas yet with a commitment to good corporate governance.
*All Elite Rated funds, TR in GBP, 01/01/2016–27/06/2016 1FE Analytics, FTSE All Share vs MSCI Emerging Markets, TR in GBP, 31/12/2015–05/07/2016
**J.P.Morgan Asset Management, Guide to the Markets, 3Q 2016, as of 30 June 2016
***Aberdeen Latin American Equity factsheet, 31 May 2016
****Lazard Emerging Markets factsheet, 31 May 2016
*****FE Analytics, IA Global Emerging Markets, TR in GBP, 01/07/2006–06/07/2016
******M&G Global Emerging Markets factsheet, 31 May 2016