Capture an emerging markets re-rating with Advance Developing Markets

If you are also of this view, a good way to get exposure is through an emerging markets investment trust, as the discounts on these have also widened, meaning you could benefit from a re-rating both at the trust and underlying holding level. Advance Developing Markets Fund (ADMF) is trading on a discount to net asset value (NAV) of around 11 per cent. As well as investing in an out-of-favour part of the market, the investment trust had been performing poorly, in part because of its value approach to investing.

However, since a change in chief investment officers at its management company, Advance Emerging Capital, in July last year the trust has started to outperform its benchmark, MSCI Emerging Markets Index. This strong performance has been helped by the trust's asset allocation, which includes an overweight position to China and underweight to Latin America, as well as a good selection of underlying holdings. If the trust's performance continues to improve, the discount might tighten.

"Emerging markets have been out of favour now for several years and this is reflected in wide discount levels in the investment trust subsector," say analysts at Winterflood. "This presents an opportunity for Advance Developing Markets, which has 57 per cent of its assets invested in closed-end funds. As and when sentiment towards the sector improves, we would expect discounts to tighten and this should provide a significant following wind to performance. Consequently, we believe that the fund is an attractive value play at its current discount."

Advance Developing Markets seeks investment trusts that trade at attractive discounts to NAV rather than direct equities, and it has been able to find a number of opportunities amid the recent volatility. If emerging markets do better, both the ratings of these trusts and their underlying holdings could improve.

The trust also invests in open-ended funds that its managers consider to be the best in their area, and they negotiate low fee terms with the companies that run them, helping to reduce internal costs and so eating less into returns. The trust has an ongoing charge of 1.12 per cent, which is low compared with some other funds of funds, and cheaper than a number of its Association of Investment Companies (AIC) sector peers.

Advance Developing Markets has just 39 holdings, but these are funds which hold a number of shares, so it offers very diversified exposure, which can be a good way to mitigate risk. It also offers access to funds listed or domiciled abroad, which might not be easy for UK private investors to access, and high-risk funds with a narrow focus that you might not want to have as a direct holding in your portfolio.

Buying closed-end funds at discounts can hit the trust's performance negatively in the short term, especially during periods of volatility. Past performance has been poor and there is no guarantee that the new lead managers can continue the recent improvement. The trust also has a performance fee, so charges could rise if it continues to perform better. However, if you believe emerging markets have long-term potential, and can tolerate volatility and risk, Advance Developing Markets looks like a good value way to get exposure. Buy.

Source: Morningstar & *Westhouse

Performance

Source: Morningstar, as at 20 July 2015

TOP 10 HOLDINGS, as at May 2015 (%)

Geographic breakdown (%)