Emerging market funds – alternatives to Aberdeen

14th February 2013

img

With the grand-daddy of the emerging markets sector, Aberdeen, soft-closing its range of funds to new investors, they may have to be a little more imaginative about their emerging markets exposure in future. It has generally been seen as a sector lacking in choice, but there are alternative options as Cherry Reynard writes.
The first question investors may want to ask is whether they want a like-for-like replacement. The Aberdeen funds prioritise quality companies, often with global earnings, and often based in countries that are nearing developed market status. This has given investors a fantastically smooth ride through the market turmoil in recent years.

The trouble is, if the market’s current run of positivity endures, the Aberdeen approach may underperform. Its large cap, quality-focused companies are unlikely to be the type of stocks that will do well – relatively – in a raging bull market. This has been seen since the start of the year when it has been all the smaller companies funds – such as JPM Emerging Markets Small Cap or Templeton Emerging Markets Smaller Companies – that have led the performance tables.

For those not feeling brave enough to believe that the market cheeriness is here stay, Bestinvest’s Jason Hollands says that the First State Global Emerging Market Leaders is his top recommendation: “Unlike the Aberdeen fund, there is no indication of a soft closure at this point. Our next choice among open-ended funds would be JPM Emerging Markets, managed by Austin Faurey.”

The JP Morgan fund crops up with some regularity. It makes it onto the Hargreaves Lansdown ‘Wealth 150’ list – http://www.hl.co.uk/funds/wealth-150 and the Income version makes it onto the Chelsea Financial Services Selection http://www.chelseafs.co.uk/documents/ChelseaSelection.pdf.

The Newton franchise is also popular. The Asian Income fund has been a top performer under Jason Pidcock. The Emerging market Income fund, manager by Sophia Whitbread, alongside Pidcock, is a relatively new addition to the group’s stable, but has good early performance.

There are also a couple of closed-ended vehicles worth considering, where investors will never have to be troubled with the thorny issue of soft-closure. Hollands recommends the Templeton Emerging Markets investment trust, which is currently trading at a slight discount to net asset value, and the Genesis Emerging Markets which is trading at around net asset value. Both are solid long-term performers.

But those who are willing to believe that the market’s current mood will remain in place should perhaps be looking beyond these income-focused, safety first funds. Mark Dampier of Hargreaves Lansdown recently hit out at the press for ignoring the turnaround in performance of Anthony Bolton’s Fidelity China Special Situations trust reported here on website Fundweb. Bolton’s small and mid-cap focused style was always likely to do better in more buoyant markets. The same is true for Philip Ehrmann’s Jupiter China fund. Its small and mid cap bias has hurt performance over the past few years, but it should do better in a rising market.

Fund ratings firm Morningstar recently provided some alternative ideas. One fund that has made it on to adviser’s radar is the £142.7m Somerset Emerging Markets Dividend Growth fund, run by boutique emerging markets firm Somerset Capital Management. Somerset has made it into the portfolios of Rob Burdett and Gary Potter, joint heads of Multi-Manager at Thames River Capital. They like the fact that the group’s funds are ‘small and nimble’ and can seek out opportunities others – by virtue of their size – may not be able to touch.

The Morningstar piece also highlighted regional products such as JPMorgan Asset Management’s £191.5m New Europe fund, which allows exposure to Russia, and Aberdeen’s £379.2m Asian Smaller Companies investment trust.

Morningstar highlights the relatively unknown Renaissance Sub Saharan fund, managed by Sven Richter, previously of Templeton, and the Robeco Asian Stars Equities fund, which holds a concentrated Asian portfolio, and is managed by Michiel Van Voorst. The manager aims at identifying the Asian companies that are the best placed to benefit from long-term growth trends in the region.

There are also other ways to get exposure to emerging markets. The consumer trends funds from, for example, JP Morgan or Dominion will tap into the growth of emerging market consumers, as will some of the US funds that prioritise global brands with growth in emerging markets (Coca-Cola, Starbucks). The problem in some areas is that the growth of the emerging market consumer has become a well-recognised and widely followed trend. This means attractive valuations are hard to come by in this area.

Emerging market bond funds (both government and corporate) are not likely to see the stellar performance of their equity peers if risk aversion diminishes, but they do offer a higher income stream and represent a credible alternative to developed market government bonds in the current climate.

Aberdeen has become a default choice for emerging market investors. But it might not have been the right choice for the current market anyway, so rather than complaining that they can’t get in any more, investors should look at the other options out there, particularly in places that have been unloved over the past few years. If the market’s positive mood continues, their time might finally have arrived.

29 thoughts on “Emerging market funds – alternatives to Aberdeen”

  1. Anonymous says:

    Hi Shaun,

    The money flowing out of Ukraine and Russia must go somewhere. Given the US threat of sanctions targetted against individual oligarchs, their increasing or keeping money in US banks must appear risky.

    The Euro by comparison will look like a safe haven, especially given Gazprom’s ability to shut off Europe’s gas on a whim.

    The above is obvious to investment bankers – giving some a motivation to try be quicker than the general herd.

    1. dutch says:

      and after the Cyrpiot haircut,the periphery of the EU isn’t going to be beneficiary of hot money flows is it?

      1. Andy Zarse says:

        I was about to say, Cyprus is nice this time of year…
        Incidentally Shaun, I was roundly told off in a meeting yesterday for calling it “The Ukraine”; it is no longer “The” and apparently nowadays is simply “Ukraine”!

        1. forbin says:

          isn’t that soon to be East Ukraine and West Ukraine ?

          :-)

          Forbin

          1. Rods says:

            I hope not for the region’s stability and Ukraine’s sake.

          2. Anonymous says:

            Does not need to be disasterous if done the Czechoslovak way

        2. Anonymous says:

          That’s right. I will repeat the comment I made when Shaun had a commentary on the Ukrainian economy:

          I believe the position of the Ukrainian government is that the usage of the article is suggestive of a region (“the Scottish highlands”, “the American South”) rather than a sovereign state. I’m not sure
          that this is altogether true. No one doubts the sovereignty of the Netherlands. Just the same, a country has a right to choose how it is referred to.

          Incidentally, the same problem occurs in Russian-language references to Ukraine. Previously, Russians wrote на Украйнe [na Ukrayne] for “in the
          Ukraine”, на being the preposition commonly used for a region. Now, Russians generally write в Украйнe [v Ukrayne] , в being the preposition more
          commonly used for countries, although not all Russians have switched. Andrew Baldwin

          1. Anonymous says:

            Hi Andrew (and others)

            I am with you now and have changed that title. I did see the original comment but for some reason made a mistake and thought you were discussing how what and where translated! My bad, so apologies and corrected now.

          2. Anonymous says:

            Дякую Шон. (Thank you, Shaun.) I apologize for duplicating my comment above; the first version didn’t register immediately and I thought it was lost in the ether. I have no complaints. You do a wonderful job of providing content, five days a week. Andrew Baldwin

        3. Anonymous says:

          Andy, I will repeat the comment I made on Shaun’s commentary, “Where next for the economy of the Ukraine?”:

          I believe the position of the Ukrainian government is that the usage of the article is suggestive of a region (“the Scottish highlands”, “the American South”) rather than a sovereign state. I’m not sure
          that this is altogether true. No one doubts the sovereignty of the Netherlands. Just the same, a country has a right to choose how it is referred to.

          Incidentally, the same problem occurs in Russian-language references to Ukraine. Previously, Russians wrote на Украйнe [na Ukrayne] for “in the
          Ukraine”, на being the preposition commonly used for a region. Now, Russians generally write в Украйнe [v Ukrayne] , в being the preposition more
          commonly used for countries, although not all Russians have switched. Andrew Baldwin

        4. Rods says:

          I found this a fews weeks ago where I had helped my wife with her English, where she is doing a part time English degree and her tutor told her (me) off for using “the Ukraine” and not “Ukraine”.

      2. Anonymous says:

        I’d put my money in Germany. In the event (however unlikely) of a euro fragmentation or disintegration, I’d expect a new DMark to become stronger.

        1. Anonymous says:

          Hi ExpatInBG

          An interesting idea, taking out a sort of call option on the possiblity of a DMark phoenix rising from a possible Euro ashes. On the lines of those who wanted their Euro notes to have an X on them..

          It makes me wonder how high a new DMark would go? One thing we can be sure of if it was a record in the charts Billboard would be putting a bullet next to it!

          There were signs in the week of strains at the Swiss National Bank and if we had a DMark I would say that the Bundesbank would have them but times ten.

          1. Anonymous says:

            It’s risk avoidence. It avoids the opposite risk, that a periphery currency sinks. Cypriot banks froze customer funds. I suspect a German bank freeze would cause a political earthquake in Berlin, ending careers.

            How high would a new DMark go ? And another question, could a hard, low inflation, debauchery free DMark usurp the dollar’s reserve currency status ?

  2. forbin says:

    Hello Shaun,

    “safe” is a comparative word ….. with global market Hot Money being able to transfer in nano seconds its a wonder we don’t have tsunamis of money movements!

    best safe port ?

    on the inflation front I finally got to compare my online shopping food bills …

    for the same 46 items I saw and increase of 28% over 4.75 years. thats 5.98% pa.

    Start date June 2009 and end date today March 2014.

    did anything actually go down in prices? loos rolls, nacho kits and flour tortillas !

    household went up the most , bleach, tissues

    now to check gas , electric and water …. and wages ofcourse

    Forbin

    PS: yes I did forget the popcorn….. Duh!

    1. Anonymous says:

      Hi Forbin

      I agree about the word safe as it is a bit like many things in the world of physics open to continual reinterpretation. Definitely one for my financial lexicon for these times.

      On the inflation front I have found the essentials index again by Tim Worstall. If we take 2002=100 then he has CPI rising to 132 at the end of 2012 but his essentials index had risen to 169.

      Putting it another way real wages deflated by the essentials index were in 2012 only 80% of those in 2002. Chilling isn’t it?

      1. therrawbuzzin says:

        Try the same calculation but use the benefits index (benefits pay ONLY for essentials and there is no slack) instead of wages.

  3. Pavlaki says:

    Have you read Frances Coppola’s comments on the Euro project? Essentially saying that without fiscal and political union it is doomed and (as you have frequently pointed out) the Eurozone is diverging, not converging. Reports I have from Greece are horrendous and I will see first hand after Easter when I visit friends and relatives in Athens. All of this is brushed under the carpet by the forex markets who pin their faith on Draghis comments and his actions which, as you point out, are like those of an ersatz Bundesbank.

    1. Anonymous says:

      Hi Pavlaki

      Thanks for the mention of Frances’ article and to answer I have met her twice for coffee etc so was aware of her views although I have only just read that particular post. Actually on those grounds it was doomed from the beginning I think although I cannot type doomed without thinking of private Fraser from Dad’s Army….

      It is interesting to see a case based on broad money case which of course is the opposite right now of the narrow money arguments of Simon Ward.

  4. arrbee says:

    There was an article in Private Eye this week explaining where some of this UK investment may have originated

    http://www.private-eye.co.uk/sections.php?section_link=news&issue=1361

    1. Anonymous says:

      Thank you very much for the link, arrbee. I liked the conclusion: “Without policing the lawless company-incorporation business, for which
      there are no real plans, tomorrow’s Yanukovyches will still find a useful
      corporate haven in supposedly respectable Britain.” Bravo, Private Eye! Andrew Baldwin

    2. Rods says:

      Thank you for the link. I will send an email to my local MP with this link.

  5. Noo 2 Economics says:

    Are the UK Pound Sterling and the Euro safe havens in the currency wars?

    Yes for the moment, the UK is doing well comparatively:
    1. low inflation,

    2. strong(ish) growth,

    3. a fiscal position which is …er…good compared to most other advanced economies and
    4. an appreciating currency courtesy of the first 2 phenomena which reinforces falling inflation (although I expect it to start rising again later this year unless the GBP just keeps going up). What’s not to like for a foreign investor?

    The market sees (as I have) an improving periphery (notwithstanding their GDP’s are still shrinking – but not for much longer imo) whilst the core has stabilised (collectively) so lotsa money to be made in periphery markets and probably some to be made in core.

    This is underpinned by both the UK and the EU steadily growing narrow money supply so it’s a done deal. In the UK we see steadily improving unemployment figures and an upwards trend in pay rises ( I still maintain that we will see inflation wage rises by the end of this year).

    I’m not saying everything is going great, but in the ugly contest the UK and EU are a couple of the less ugly ones. Abe is determined to devalue the yen so a currency investor looks for somewhere else to go – the Swissy? not much more can be made there thanks to the Swiss central bank, US dollar? maybe but look at their debt and look at the UK’s.

    I guess you’re questioning the (lack of a) link between financial markets and the real economy and of course there isn’t much of one which underlines how broken the global financial system is, but I think the above points demonstrate what investors are thinking and there is some consideration given to the real economy as the money moves are made, but will this help the real economies? I think it will a bit but not as much as it helps the 1%.

    By the way I think Draghi doing exactly the right thing now. EZ inflation will stabilise and start slowly increasing in April/May as long as he does absoloutely nothing – look at EZ money growth in first half of 2012. Maybe he thinks the same as me.

    1. Anonymous says:

      Hi Noo2

      Over the time that I have been following currency movements and economics there have been a lot of theories as to what drives currencies many of them contradictory! Some have also how can I put it had better days….

      Reviewing your list I think it is instructive to compare the UK and Euro area. where we are better at point 2 and the Euro area is collectively better at 3. One can argue about point one whether it is better to be pretty much on target (UK) or well below it (Euro). However you spin them we both benefit from point 4 and here comes my addition that this is somewhat self-fulfilling. So like the children’s game ker-plunk can it all come crashing down if one straw is removed? I fear it might….

      Here is something else which is self-fulfilling which is that bond investors want an appreciating currency or at least a stable one. If they have jumped on the Euro bandwagon (shrinking ECB balance sheet aka tightish policy) then we may have another reason behind the rally in its bond markets.

  6. Rods says:

    Hi Shaun,

    An interesting blog. I think the Euro as long as Germany has a major say in its running will be considered a safe haven currency. But TARGET2 suggests some areas are safer than others, with Germany being the destination of choice.

    I think “Won’t get fooled again” by The Who probable describes the currency situation quite well, where last weeks out of favour currency, is this weeks safe haven depending how the sands are shifting in the various economies and currency wars. USD during full QE have chased better returns in developing nations, now tapering and improved US bond yields and a growing economy is making the US more attractive for investment those investments are being withdrawn and with a countries currency then dropping, this can only increase to minimise losses, another of your unstable lifeboats me thinks.

    1. Anonymous says:

      Hi Rods

      Thanks for the Who reminder,there was a map of London produced for best selling artists in each borough and if we put aside how they know this The Who won mine. As to the US the theories of econ 101 are not going so well as the taper era of less policy accommodation is seeing a weaker US Dollar up to now anyway. This of course provides more food for thought for those currencies falilng against the greenback.

      As to the situation of Ukraine ( is that right?) I note that the National Bank has told the Wall Street Journal that 10% of bank deposits have fled. Credit crunch alert I think…

  7. Anonymous says:

    Thank you Shaun, fascinating piece as ever. Can anyone here look deep into their crystal ball and comment upon what might be the events to lead to a massive fall in GBP ‘value’?

    1. therrawbuzzin says:

      Scottish Independence without currency union.

  8. Anonymous says:

    Shaun,
    £ & € loosely tied by geography with £ present premium as a fiat currency plus lax financial controls?
    Are the SFr & Yen “twins” no longer linked at least?
    Perhaps the Aus$ & Can$ are better candidates for now?
    Growth in multi-currency accounts and notice Citi bank offering rapid transfers as plus point!

Leave a Reply

Your email address will not be published. Required fields are marked *