MSCI Emerging Markets index did not do as well as a number of other major global indices in 2019, albeit with a double-digit return of 13.86 per cent. But one year does not change the investment case for a region with the potential to deliver strong growth over the decades ahead – as long as you position yourself in the areas and companies that will deliver it. Emerging markets encompass a vast array of countries and companies across various continents, which are very different and have delivered very different returns from each other.
Good longer-term performance
Experienced managers
Rigorous stock selection approach
Diversified exposure
Differentiation
Short-term underperformance
So if you invest in this area you are likely to do better if you pick an active fund whose managers can select investments that will capture this potential growth. A case in question looks to be Artemis Global Emerging Markets Fund (GB00BW9HL132).
“Artemis Global Emerging Markets’ [managers’] approach is to find shares with good growth prospects, attractive valuations and a catalyst for a future upward rerating," says Tom Stevenson, investment director for personal investing at Fidelity International. "This is a well-diversified fund, which eliminates some of the company-specific risk that can often hurt the performance of an emerging market fund.”
The fund’s managers, Peter Saacke and Raheel Altaf, use an in-house tool to screen for stocks that have strong growth in earnings, consistent upgrades to their forecast profits and are benefiting from macroeconomic trends, but are currently unpopular so trade on below average valuations. They then analyse them to see if there is substance behind the attractive characteristics the stock screen has identified, for example to ensure that acquisitions, disposals or accounting changes haven’t distorted the companies’ financial characteristics.
From these they pick a selection of 80 to 120 stocks diversified by sector, country and investment style. The fund has a quarter of its assets in financials, 11.4 per cent in each of industrials and information technology, and 10.5 per cent in consumer discretionary services.
“While this is not a classic value fund, its process tries to avoid value traps by identifying positive catalysts for future rerating,” comment analysts at Fidelity. “The approach can be better characterised as growth at a reasonable price with catalysts. Although the approach is all-cap in nature, the fund further differentiates from the competition given the structural bias towards small and mid-sized companies. The fund is expected to keep up or marginally outperform in rising markets, and equally deliver good outcomes in falling markets.”
However, the fund only launched in 2015 so has a track record of less than five years, and over one year has underperformed MSCI Emerging Markets index and the Investment Association (IA) Global Emerging Markets sector average. The exposure to small- and mid-caps also increases its risk and potential for volatility.
However, the fund’s managers have much longer investment experience than the history of the fund: Mr Saacke has been running global equities via the same approach since 2004 and European equities since 2002 at Artemis Asset Management, before which he was an equities analyst.
Mr Altaf has managed funds since 2007 at Fidelity, Fulcrum Asset Management and Artemis, before which he was a quantitative analyst.
And the fund’s cumulative returns have been influenced by recent underperformance, in part due to its exposure to smaller companies and value investment style, and lack of exposure to Chinese internet companies. By contrast, in 2016, 2017 and 2018 the fund beat MSCI Emerging Markets index and the IA Global Emerging Markets sector average, and the fund’s managers argue that the contrarian positioning has the potential to pay off in the future.
Although smaller companies are riskier they can deliver stronger growth over the long term – the time frame over which you should hold this fund. Its diversification also helps to offset the risk of this area, and the lack of exposure to Chinese internet companies differentiates it from a number of other emerging markets and Asia funds
So if you are investing for growth over the long term and can tolerate volatility along the way, Artemis Global Emerging Markets Fund looks like a good way to exploit emerging markets' potential. Buy. LW
Artemis Global Emerging Markets Fund (GB00BW9HL132)
| Price | 147p | Mean return | 10.52% |
| IA Sector | Global Emerging Markets | Sharpe ratio | 0.85 |
| Fund type | Open-ended investment company | Standard Deviation | 11.12% |
| Fund Size | £364.73m | Ongoing charge | 0.95% |
| Launch date | 08-Apr-15 | Yield | 2.58% |
| Manager start date | 08-Apr-15 | More details | www.artemisfunds.com |
| Number of holdings | 92* |
Source: Morningstar as at 9 January 2020, *Artemis Asset Management.
Performance
| Fund/benchmark | 6-month total return (%) | 1-year total return (%) | 3-year cumulative total return (%) |
| Artemis Global Emerging Markets | 0.72 | 15.49 | 33.67 |
| IA Global Emerging Markets sector average | 2.5 | 18.12 | 29.32 |
| MSCI Emerging Markets index | 2.65 | 16.46 | 29.54 |
Source: FE Analytics as at 3 January 2020
Top 10 holdings (%)
| Samsung Electronics | 2.9 |
| Country Garden | 2.8 |
| ICBC | 2.5 |
| Anhui Conch Cement | 2.4 |
| Hon Hai Precision Industry | 2.3 |
| ENN Energy | 2.2 |
| Chailease | 2.1 |
| China Resources Land | 2.1 |
| Thanachart Bank Public | 2.1 |
| Lukoil | 2.1 |
Source: Artemis as at 30 November 2019
Geographic allocation (%)
| China | 35.5 |
| Korea | 12 |
| Taiwan | 9.1 |
| Russia | 7.1 |
| South Africa | 4.3 |
| Mexico | 4 |
| Brazil | 3.9 |
| Turkey | 3.9 |
| India | 3.3 |
| Philippines | 3 |
| Thailand | 2.7 |
| Poland | 1.9 |
| Other | 9.5 |
Source: Artemis as at 30 November 2019
