Emerging markets include some of the world's fastest-growing economies which often have young populations, vast resources and a growing middle class. For example, 55 per cent of India's population is under below 30. And in 2015 India's gross domestic product (GDP) grew 7.9 per cent and China's grew 6.9 per cent, in contrast to the global average of 2.7 per cent, according to the World Bank.
- Good long-term performance
- Well resourced management team
- India exposure
- Emerging markets growth
- Poor short-term performance
"The growth potential of India and indeed the growth already coming through is not currently reflected in the market's valuations which are trading close to their long-term averages," says Adrian Lowcock, investment director at Architas. "India is also forecast to generate earnings growth ahead of other emerging markets over the next couple of years. In addition, India's current account deficit has fallen from 4.7 per cent of GDP in 2013 to 1 per cent expected this year, while overseas debt is now 23 per cent of GDP. As such the country is less sensitive to rising US interest rates or a strong dollar."
Despite the strong investment case, investing in a single country emerging markets fund is very high risk. So for many investors, a better way to access India's growth could be a broad emerging markets fund such as Fidelity Emerging Markets (GB00B9SMK778), which also offers exposure to other emerging markets with the potential for strong growth.
This fund has significant exposure to Indian companies in which it has 10 per cent of its assets. But it also has 18.2 per cent in China, 12.3 per cent in South Africa and 10.6 per cent in Hong Kong, helping to diversify risk and widen the range of potential investment opportunities.
In terms of performance, Fidelity Emerging Markets is among the top 25 per cent of funds in the Investment Association (IA) Global Emerging Markets sector over three and five years, and has beaten its benchmark, MSCI Emerging Markets Index, over these periods.
Fidelity Emerging Markets aims for long-term capital appreciation by investing in the securities of countries experiencing rapid economic growth. While the emerging markets stocks universe is vast, the fund only holds 50 to 100 companies at any one time, as it seeks to invest in its best ideas.
Nick Price, who is a qualified accountant, has managed the trust since June 2010. He is in charge of portfolio allocation and stock selection, but is supported by three regional portfolio managers who cover emerging Asia, Latin America, Europe, the Middle East and Africa. They are also helped by around 45 emerging markets analysts who feed ideas into the managers.
They focus on finding quality growth companies that make superior and sustainable returns on assets, and have strong, unleveraged balance sheets, shareholder-friendly managements and reasonable valuations over a full economic cycle. The fund's largest sector allocations are financials and consumer discretionary which each account for over 26 per cent of its assets, and information technology which accounts for 20 per cent.
Over one year the fund was one of the worst performers in its sector and failed to beat its benchmark. But this was due to last year's shift in investment style from growth to value when areas such as commodities, to which the fund has low exposure, bounced back.
"This fund is more focused on longer-term investing, and less on value and recovery stocks," says Mr Lowcock. "But if emerging markets continue to do well you would expect its holdings in banks and other financials, which tend to do well in growing economies, to benefit."
So if you want to tap into the growth potential of emerging markets, then Fidelity Emerging Markets Fund's strong long term record and well-resourced research team make it a good option. Buy. EA
Fidelity Emerging Markets Fund (GB00B9SMK778) | |||
|---|---|---|---|
| Price: | 143.5p | 3-yr mean return: | 14.26% |
| IA sector: | Global Emerging Markets | 3-yr Sharpe ratio: | 0.93 |
| Fund type: | Oeic | 3-yr standard deviation: | 13.98% |
| Market cap: | £1.9bn | Yield: | 0.55% |
| No of holdings: | 58* | Ongoing charge: | 1.01% |
| Set-up date: | 28/07/97 | More details: | fidelity.co.uk |
| Manager start date: | 22/03/10 | ||
Source: Morningstar as at 5/06/17, *Fidelity International as at 30/04/17
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) |
|---|---|---|---|
| Fidelity Emerging Markets | 33.7 | 45.8 | 72.7 |
| MSCI Emerging Markets index | 43.9 | 37.6 | 52.2 |
| IA Global Emerging Markets sector average | 40.8 | 37.1 | 52.0 |
Source: Morningstar, as at 2/06/17
Top 10 holdings as at 30/04/17 (%)
| Naspers | 6.45 |
| Taiwan Semiconductor Manufacturing | 5.79 |
| AIA Group | 5.15 |
| HDFC Bank | 5.01 |
| Steinhoff International | 3.74 |
| Fidelity ILF | 3.54 |
| Sberbank of Russia | 3.48 |
| Baidu | 3.43 |
| Samsonite International | 3.11 |
| Grupo Mexico SAB de CV | 2.42 |
Source: Fidelity International
Geographic breakdown as at 30/04/17 (%)
| China | 18.0 |
| South Africa | 13.1 |
| Hong Kong | 10.5 |
| India | 10.0 |
| Russia | 9.9 |
| Taiwan | 7.6 |
| Brazil | 6.2 |
| Mexico | 5.6 |
| South Korea | 3.3 |
| Indonesia | 3.0 |
| Other countries | 8.2 |
Source: Fidelity International
IC Tip rating
| Tip style | Growth |
|---|---|
| Risk rating | High |
| Timescale | Long term |
