Join our community of smart investors

Top 100 Funds: Emerging markets (7 Funds)

Our pick of the best funds for exposure to emerging markets
September 13, 2018

Perhaps the most important area for long-term growth investors is emerging markets, because populations and wealth in these parts of the world are growing as the countries, economies and markets develop. These markets are also less researched than developed markets so should give active managers more opportunities to find good companies. But along with growth potential comes a lot of risk, as these areas are less politically stable and have lower levels of corporate governance than developed economies. So funds focused on these areas are better suited to investors with long-term time horizons and high risk appetites.

FUNDS DROPPED: Templeton Emerging Markets Investment Trust's (TEM) 

Manager Carlos Hardenberg left at the end of March. The trust had performed very well since Mr Hardenberg started managing it in October 2015, making a 95.5 per cent cumulative share price return over the two years to the end of December 2017 compared with 67.5 per cent for MSCI Emerging Markets Index.

Chetan Seghal took over as lead manager on 1 February. He had been a portfolio manager on the trust since late 2015, and is also director of global emerging markets and small-cap strategies at Templeton Emerging Markets. And from 17 September Andrew Ness will be a portfolio manager on the trust. He joins from Martin Currie where he was a senior member of its global emerging markets equity team and has over two decades experience as an emerging markets equity manager.

Although the trust is being managed by two experienced professionals and likely to be run in the same way, it is not clear if it will be able to continue to make the outstanding returns it made under Mr Hardenberg, and five of our panel suggested dropping it. There are also a number of other good emerging markets funds.

 

NEW ENTRANT: JPMorgan Emerging Markets Investment Trust (JMG)

Two of our panel – David Liddell, chief executive of online investment service IpsoFacto Investor and Ewan Lovett-Turner, director, investment companies research at Numis Securities – suggested adding JPMorgan Emerging Markets Investment Trust to the IC Top 100 Funds. It beats MSCI Emerging Markets index over one, three and five years, as well as many of its sector peers. The trust’s management team, which has been led by Austin Forey since 1994, aims to invest in quality stocks from across emerging markets that are also attractively valued. And it is supported by an extensive network of country and sector specialists.

China accounts for over a quarter of the trust’s assets and India about 22 per cent. It also has allocations of around 10 per cent to South Africa and Brazil. Financials are its largest sector exposure, accounting for about a third of assets and it has nearly as much in IT. Consumer company shares account for over 20 per cent of assets.

 

NEW ENTRANT: Hermes Global Emerging Markets (IE00B3DJ5K90)

Hermes Global Emerging Markets has a good record of outperforming MSCI Emerging Markets index, and is one of the best-performing Global Emerging Markets sector funds over three and five years. Its investment team, led by Gary Greenberg, looks to invest in quality companies on attractive valuations, on the grounds that this indicates further upside potential and reduces the risk of capital loss. They also incorporate environmental, social and governance factors into their analysis to get a comprehensive view of risk and opportunity.

Mr Greenberg and his team target efficient and sustainable companies where growth is secured by robust, defensible franchises. These companies typically generate a high return on equity and maintain strong balance sheets. They also consider the economic conditions in which companies operate, favouring emerging economies that provide environments supportive to growth, although they select holdings according to their individual merits. The fund is currently focused on Asia but its managers can invest across all emerging markets regions.

 

Newton Global Emerging Markets (GB00BVRZK937)

Newton Global Emerging Markets has a good long-term performance record although over the short term its returns can be volatile. Lead manager Rob Marshall-Lee takes high-conviction bets, switching between areas he thinks will outperform. The fund’s focus on consumer shares, in which it has about a third of its assets, means it often lags when the oil price rallies, given its low exposure to commodities. The fund aims for long-term growth by capturing the growth premium associated with dynamic shifts in emerging markets.

 

Fidelity Emerging Markets (GB00B9SMK778)

Fidelity Emerging Markets’ manager, Nick Price, aims to buy quality companies at a reasonable price. He prioritises quality because he thinks this will be beneficial to long-term returns, as emerging markets mature and investors’ focus shifts from the pace of growth to its sustainability. He favours companies with strong market positions and competitive advantages, as these are typically able to deliver attractive earnings throughout the economic cycle. He also likes companies that deliver superior returns on their assets and have well-capitalised balance sheets.

Mr Price and his team set a target price for every stock they are considering investing in and use this metric to help narrow down the possible choices.

 

Schroder Small Cap Discovery (GB00B5ZS9V71)

Schroder Small Cap Discovery invests in smaller companies which, at the time of their purchase, are similar in size to those comprising the bottom 30 per cent by market capitalisation of the equities market in Asia and emerging markets. Schroders says Asian and emerging markets smaller companies are extensive, diverse and constantly changing and include niche growth areas that often cannot be accessed through large companies. Smaller companies also tend to grow more rapidly than larger ones.

Although this fund could deliver strong returns over the next 10 or 20 years, it invests in a very high-risk area and could experience considerable volatility along the way – as its annual returns so far demonstrate. So this could be a racy option for very long-term investors with a high risk appetite, accounting for only a small portion of diversified portfolios.

The fund is run by highly experienced Asia investors Matthew Dobbs and Richard Sennitt, and has more than 100 holdings which helps to mitigate the individual risk of the companies it holds.

 

BlackRock Frontiers Investment Trust (BRFI)

BlackRock Frontiers Investment Trust has a good record of outperforming MSCI Frontier Markets index, and is one of the few options available to private investors for getting exposure to these markets, which are even less developed than emerging markets. Frontier markets typically have lower market capitalisations and less liquid stock exchanges, making them higher risk, so are only suitable if you have a very high risk appetite and long-term investment horizon. But they have the potential for even stronger growth than emerging markets.

Earlier this year the trust expanded its investment mandate to enable it to invest in countries that are neither part of MSCI World Index of developed markets or one of the eight largest countries by market capitalisation in MSCI Emerging Markets Index.

The trust’s board has recently proposed being the rollover option for shareholders in BlackRock Emerging Europe (BEEP). This is an investment trust that has decided to wind up and is also run by Sam Vecht, co manager of BlackRock Frontiers Investment Trust.

Shareholders in both trusts will vote on the proposals. If they agree to them, ‘C’ shares in BlackRock Frontiers will be issued to BlackRock Emerging Europe shareholders that opt to roll over at 100p a share. They will be converted into ordinary shares on a NAV for NAV basis once the ‘C’ share portfolio has been substantially invested. Possible benefits for BlackRock Frontiers Investment Trust shareholders include an increase in its marketability and liquidity of its shares, and a reduction in the ongoing charge.

The costs of the scheme will be deducted from the ‘C’ share pool so that they are effectively borne by BlackRock Emerging Europe shareholders that roll over. BlackRock will meet any costs that exceed 1 per cent of the value of the ‘C’ share pool, so the opening NAV of the C shares will not be less than 99p a share.

 

Aberdeen Latin American Equity (GB00B4R0SD95)

Aberdeen Latin American Equity can make strong returns, but is also subject to bouts of short-term volatility. So, as with other single-country or regional emerging markets fund, this is only an option if you have a very high risk appetite and long-term investment horizon.

The fund’s investment team looks for quality companies with straightforward businesses, recurring earnings growth and strong balance sheets that can support expansion, and which are shareholder friendly. One of their key disciplines is to avoid overpaying for shares, and they sell them when they consider valuations are stretched. The fund is relatively concentrated with 45 holdings.

 1-year total return (%) 3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge (%)Manager start date
NEW ENTRANT: JPMorgan Emerging Markets Investment Trust (JMG)1.9867.8769.661.07**01/06/1994*
NEW ENTRANT: Hermes Global Emerging Markets (IE00B3DJ5K90)-2.6272.8383.021.1301/07/2011
Newton Global Emerging Markets (GB00BVRZK937)-4.1362.3673.860.902/09/2013
Fidelity Emerging Markets (GB00B9SMK778)-5.2652.8258.340.9822/03/2010
Schroder Small Cap Discovery (GB00B5ZS9V71)-4.5337.459.110.9815/03/2012
MSCI Emerging Markets index-1.5463.6752.19  
BlackRock Frontiers Investment Trust (BRFI)-5.0556.2454.441.64**Sam Vecht 17/12/10, Emily Fletcher, 17/05/13*
MSCI Frontier Markets index-6.635.1741.85  
Aberdeen Latin American Equity (GB00B4R0SD95)-18.0353.619.021.1907/02/2011
MSCI Emerging Markets Latin America index-12.5653.2710.06  
Performance data: FE Analytics as at 31 August 2018. Figures for investment trusts are share price total returns.
‡ The history of this unit/share class has been extended, at FE’s discretion, to give a sense of a longer track record of the fund as a whole. Ongoing charge: fund provider unless otherwise indicated. Manager start date: fund provider/FE Trustnet unless otherwise indicated. *Morningstar. **Association of Investment Companies