Emerging markets are often touted as a source of superior returns, but the MSCI Emerging Markets index trails other major indices in the UK, Europe, US, Japan and Asia in sterling terms over 10 years to the end of September 2019. And over three and five years it is only ahead of the UK's FTSE All-Share index.
Strong performance
Long-term approach
Rigorous research
Diversification
Growth style
But, although the overall MSCI Emerging Markets index may not have done as well as other indices over the past decade, it doesn't change the fact that within emerging markets there are still many rapidly growing companies and economies that could be valuable inclusions in a growth portfolio. However, the work involved in finding winning businesses and the risky nature of this asset class means that emerging markets exposure is best obtained via an active fund with a proven and successful process.
One good example of such a fund is Baillie Gifford Emerging Markets Growth (GB0006020647), which has significantly outperformed MSCI Emerging Markets index and the Investment Association (IA) Global Emerging Markets fund sector average over one, three, five and 10 years.
Much of this comes down to an approach employed across many Baillie Gifford funds – selecting holdings on the basis of their own merits (rather than sector or geographic considerations) with a growth bias. The fund’s managers, Richard Sneller and Mike Gush, look for stocks that should grow faster than the market for a longer period than other investors expect and take a longer-term view of around five years. They tend to run their winners and spend little time moving the portfolio around, meaning that the annual turnover of the fund's holdings was just 12 per cent at the end of September. They also conduct rigorous analysis on potential holdings and discuss their merits with other colleagues at Baillie Gifford to get broader investment insights.
The fund typically holds between 60 and 100 stocks, so it has a good level of diversification, which helps to offset the heightened risks of investing in emerging markets. The portfolio had 76 holdings at the end of September, according to data provider FE Analytics.
The fund is also exposed to a good range of economies. At the end of September, it had 31.2 per cent of its assets in China, 14.5 per cent in India and 12.2 per cent in Brazil, and also has holdings listed in South Korea, Taiwan, Russia, Mexico and Thailand.
As is the case with many Baillie Gifford equity funds, some of Baillie Gifford Emerging Markets Growth's biggest positions are fairly large. For example, at the end of September its biggest four positions each accounted for between 5.2 and 6 per cent of its assets.
The fund's managers have backed a number of highly popular and successful Asian tech businesses, such its largest holding, Tencent (700:HKG), and top 10 holdings Taiwan Semiconductor Manufacturing (2330:TAI), Samsung Electronics (SMSD) and Alibaba (BABA:NYQ). These companies have helped to drive returns until now because large tech names and growth investments in general have fared well in recent years. However, their popularity and strong returns mean that they are now vulnerable to any shift in investor sentiment. So if you hold this fund you need to be able to tolerate these risks, and have other portfolio holdings that could offset and mitigate them.
However, Baillie Gifford Emerging Markets Growth's managers' focus on fundamental analysis should provide some reassurance that the fund's holdings have growth potential regardless of near-term sentiment. The fund's managers also have a good record of making the right choices, so larger allocations to some holdings could be beneficial.
So if you can withstand some volatility and higher risk, and want exposure to an area that has some promising growth characteristics, Baillie Gifford Emerging Markets Growth looks like a good option for extracting this potential. Buy. DB
Baillie Gifford Emerging Markets Growth
| Price | 828.6p | Mean return | 14.41% |
| IA Sector | Global Emerging Markets | Sharpe ratio | 0.89 |
| Fund type | Open ended investment company | Standard deviation | 14.61% |
| Fund size | £1.1bn | Ongoing charge | 0.78% |
| No of holdings | 76* | Yield | 1.10% |
| Set-up date | 20-Dec-99 | More details | |
| Manager start date | Richard Sneller 01/03/2005, Mike Gush 31/01/2015 |
Source: Morningstar as at 1 November 2019
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
| Baillie Gifford Emerging Markets Growth | 17.58 | 37.19 | 72.45 | 122.32 |
| IA Global Emerging Markets sector average | 12.78 | 14.73 | 39.37 | 74.38 |
| MSCI Emerging Markets index | 10.99 | 17.32 | 43.57 | 85.58 |
Source: FE Analytics, as at 31 October 2019
Top 10 holdings
| Tencent | 6.00% |
| TSMC | 5.80% |
| Samsung Electronics | 5.60% |
| Ping An Insurance | 5.20% |
| Alibaba | 4.80% |
| CNOOC | 4.20% |
| Norilsk Nickel | 4.20% |
| Sberbank | 3.80% |
| Reliance Industries | 3.50% |
| Petrobras | 3.20% |
Source: Baillie Gifford, as at 30 September 2019
Geographic breakdown
| China | 31.20% |
| India | 14.50% |
| Brazil | 12.20% |
| South Korea | 9.40% |
| Taiwan | 9.00% |
| Russia | 8.60% |
| Mexico | 3.20% |
| Thailand | 2.90% |
| South Africa | 2.30% |
| Indonesia | 2.10% |
| Others | 3.90% |
| Cash | 0.60% |
Source: Baillie Gifford, as at 30 September 2019
