14th February 2013
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.