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Catch the emerging markets rally

FUND TIP: First State Emerging Markets Leaders is one of the best of its type.
April 28, 2009

REWARDS:

• Emerging markets could have much more to come

• Fund has served investors well over time

• Strong management team

• Low costs

RISKS:

• Fund can lag momentum markets

• Emerging markets are high risk

IC TIP: Buy

Emerging markets rebounded in March as investors anticipated that the worst of the global financial crisis might be over. And some commentators think this is no bear market rally.

The recent surge saw the MSCI Global Emerging Markets index rise 37 per cent from 2 March to 16 April. Bryan Collings, manager of the Ignis International Hexam Global Emerging Markets fund, believes this marks the return of 'rationality' to markets following the indiscriminate sell-offs and technical unwinds which hit emerging equities throughout 2008 and early 2009.

Mr Collings says: "There is still a lot of trauma to work through and volatility will remain fairly high, although it has reduced markedly since its peak in November 2008. However, I do not expect to hear anything in two months' time about emerging markets challenging their lows - we are well past that point now and investors who have not had their money in the market will have missed a lot of performance. The good news for them is that there is much more to come."

As we have reported before, his fund has a short, though impressive track record and is a high-risk play on emerging markets. But a more mainstream option is First State Global Emerging Markets Leaders which won the emerging markets equity category in the 2009 UK Fund Awards from independent investment research provider Morningstar.

The awards spotlight funds that have delivered the greatest outperformance, on a risk-adjusted basis in 2008 and over the long term. They also highlight the funds that have proven most adept in preserving fund value in a year that will be remembered as a rapidly falling market. The awards methodology covers both quantitative and qualitative measures.

First State Global Emerging Markets Leaders also recently gained a Morningstar Elite qualitative rating, meaning it is one of the best of its type.

The fund aims to achieve long-term capital growth. It invests worldwide in large and mid capitalisation equities in emerging economies, including those of companies listed on developed market exchanges whose activities predominantly take place in emerging market countries.

Current regional breakdown is: Emerging Asia 53.5 per cent, EMEA 21.0 per cent, Latin America 19.6 per cent and Cash 5.9 per cent.

The fund adopts a buy and hold mindset. Stocks are looked at in terms of quality, earnings growth and valuation. Although the fund can lag in momentum lead markets, it has served investors well through time.

The high calibre of the management team makes this fund stand out. Widely respected Angus Tulloch has been fund manager since inception in 1988. Co-manager Jonathan Asante has been with First State since 2004 and took over day-to-day responsibility for the fund at the beginning of 2008.

Morningstar analysts conclude: "Emerging markets funds are high-risk and this is no exception. However, the team's unyielding focus on quality has led to resilience in down markets and below-average volatility relative to peers."

In 2008, for example, the fund lost 18.8 per cent, beating its average peer by 18.4 per cent. The fund does lag when emerging markets are led by momentum, as was the case in 2004, 2005 and 2007. However, since the fund's inception in December 2003, it has an annualised return of 12.92 per cent, easily beating the Morningstar Category average of 6.12 per cent (though February 2009).

Another bonus is the total expense ratio is well below the category median at 1.61 per cent.

First State Global Emerging Markets Leaders A Acc
PRICE212.16pSHARPE RATIOneg
SIZE OF FUND£324m1 YEAR PERFORMANCE-8.39%
No OF HOLDINGS553 YEAR PERFORMANCE21.83%
SET UP DATE1 Dec 035 YEAR PERFORMANCE95.88%
MANAGER START DATE1 December 2003 (Angus Tulloch)TOTAL EXPENSE RATIO*1.61%
1 January 2008 (Jonathan Asante)12 MONTH YIELD*0.9
VOLATILITY4.38MINIMUM INVESTMENT£1,000
TRACKING ERROR2.92MORE DETAILSwww.firststate.co.uk

Source: First State, www.ft.com/funds, *Morningstar

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