Tap China's growth the sensible way with Hermes Global Emerging Markets

If you are seeking growth over the long term but have a smaller portfolio a much better way to get exposure to China is via a broad Asia or emerging markets fund. A good option could be Hermes Global Emerging Markets (IE00B3DJ5K90), which had 35 per cent of its assets in China at the end of 2018. This is alongside investments in a number of other emerging markets, including India, Taiwan and Korea, mitigating the risk and potential volatility of each individual market. And because this fund has a broad remit, if there are problems with Chinese equities its managers can reduce exposure to them and invest in emerging equity markets with better prospects.

Because this one fund gives you a broad allocation across emerging markets you don’t need to hold other emerging markets funds alongside it. This is particularly useful for smaller portfolios with fewer assets to deploy, and generally beneficial because the fewer funds you hold, the fewer sets of fees you have to pay.

Hermes Global Emerging Markets is the top-performing fund in the Investment Association (IA) Global Emerging Markets sector over five years, and has beaten MSCI Emerging Markets index and the IA Global Emerging Markets sector average over one, three, five and 10 years.

Its lead manager, Gary Greenberg, and his team invest in companies on the basis of their own merits. They favour quality companies they think are trading at a discount, so offer potential upside and a reduced risk of capital loss. They believe this gives a margin of safety in a volatile asset class. The fund’s managers seek efficient and sustainable companies whose growth is secured by robust, defensible franchises, that typically generate a high return on equity and maintain strong balance sheets. They also favour companies in countries where conditions support growth.

The fund’s managers consider environmental, social and governance factors in their risk analysis, so this fund could be of interest to investors looking for more ethical options.

Hermes Global Emerging Markets' largest sector exposure is financials, which accounts for about a quarter of its assets, and IT and consumer discretionary each account for about 20 per cent.

Although Hermes Global Emerging Markets is not a single-country fund, it is still high risk and potentially volatile. Emerging markets involve a number of risks, including poorer levels of corporate governance than developed markets, political instability and currency exchange rate fluctuations.

Hermes Global Emerging Markets has made strong returns, but can go through periods of volatility and underperform its benchmark index over the short term. It also has a higher ongoing charge than a number of other equity funds, at 1.13 per cent.

However, if you have a long-term investment horizon you can ride out periods of volatility, over which time China and other emerging markets should deliver strong growth. Mr Greenberg is highly experienced and has a good record of actively seeking the better companies in these markets. And the fund’s strong performance has more than compensated investors for its slightly higher charges.

So if you have a high risk appetite, and want to exploit long-term growth from China and other emerging markets, Hermes Global Emerging Markets looks like a good way to do it. Buy.

Hermes Global Emerging Markets Fund (IE00B3DJ5K90)

Source: Morningstar as at 5 February 2019, *Hermes Investment Management.

Performance

Source: FE Analytics, as at 4 February 2019

Top 10 holdings (%)

Source: Hermes Investment Management, as at 31 December 2018

Geographic breakdown (%)

Source: Hermes Investment Management, as at 31 December 2018