A small-cap strategy has topped the emerging markets sectors for total returns over the past five years without exposing investors to heighted volatility or drawdowns, FE Trustnet research shows.
In this annual series, we have reviewed the Investment Association sectors on 10 different metrics: cumulative five-year returns up to the end of 2018, the individual returns of 2018, 2017 and 2016, their annualised volatility, alpha generation, Sharpe ratio, maximum drawdown, and upside and downside capture relative to the sector average.
We then score funds on their average decile ranking for these 10 different metrics in order to see which have spent the most time at the top of their peer group on a wide spread of risk and return measures.
Performance of fund vs sector and index over 5yrs to end of 2018
Source: FE Analytics
When it comes to the IA Global Emerging Markets sector, the above fund cam first in this research. JPM Emerging Markets Small Cap scored an average decile ranking of 2.6 after posting top-decile numbers for five-years returns (the highest of the peer group), alpha, volatility, maximum drawdown, Sharpe ratio and downside capture.
Run by FE Alpha Manager Amit Mehta and Austin Forey, the $1.5bn fund differs from many of its peers in that it focuses on smaller companies rather than the larger, better-known companies in emerging markets.
While smaller companies tend to be riskier than large-caps, Mehta and Forey have a bottom-up stock selection process that concentrates on high quality companies with “superior and sustainable growth potential”.
JPM Emerging Markets Small Cap is currently overweight China, South Africa and Mexico on a geographic basis and consumer staples, consumer discretionary and financials for sectors.
In second place is FE Alpha Manager Gary Greenberg’s $4.3bn Hermes Global Emerging Markets fund, which scored 2.8 in this research. It’s 66.88 per cent five-year return is the second-highest in the sector and the fund is also top-decile for alpha generation and Sharpe ratio.
Greenberg took over the fund in July 2011. While emerging markets have endured a challenging time over this period, the manager has successfully adapted the portfolio to a change in leadership in the asset class and has tilted it towards growing consumer demand.
The FE Invest team, which has Hermes Global Emerging Markets on its Approved List, said: “We like the concentrated, benchmark-agnostic approach, which we think is vital to navigate the volatile emerging markets sector. The fund is a good option for those looking for selective exposure to a region with macroeconomic concerns but huge potential in certain stocks, countries and sectors.”
Source: FE Analytics
UBS Global Emerging Markets Equity, managed by Urs Antonioli, came in third place with an average decile ranking of 2.8 but five-year return of 64.62 per cent (which is slightly lower than the gain made by Hermes Global Emerging Markets).
This £712.7m fund has a largely bottom-up process that is based around a price to intrinsic value approach, which examines the present value of a company’s short-, medium- and long-term cash flows. Despite the portfolio’s value orientation, the portfolio prefers higher quality stocks, which are identified through company visits and a detailed 32-question checklist.
The largest member of the IA Global Emerging Markets sector is the Vanguard Emerging Markets Stock Index tracker, with assets under management of £7.4bn.
While emerging markets are often cited as a part of the market where active management should thrive, this passive offering has outperformed many of its active peers in this research. The Vanguard fund has an average decile ranking of 4.9 across the 10 metrics examined, placing it 32nd out of 87 funds.
Vanguard Emerging Markets Stock Index hold a ‘Recommended’ rating from Square Mile Investment Consulting & Research. The fund research house said this rating is based on Vanguard’s “very strong commitment” towards managing passive strategies, the suitability of the index tracked, its good historic record of tracking this index, the size of the fund and its cost.
Source: FE Analytics
Looking at the funds coming last in this research, we see that Candriam SRI Equity Emerging Markets has the highest average decile ranking – scoring 9.6 because of bottom-decile numbers for every metric examined apart from 2018 returns and upside capture; it has made a 4.49 per cent loss over the five years to the end of 2018.
The fund only buys emerging market stocks that comply with the 10 principles of the UN Global Compacts and are not involved in controversial activities such as gambling or armament. It also has a preference for companies that are “well positioned to tackle global sustainability trends”.
It’s a fairly sizeable fund with assets under management of £428.2m. However, there are larger ones on the list of funds coming at the bottom of this research: Lazard Emerging Markets has a £1bn portfolio, M&G Global Emerging Markets runs £758m and there’s £524.4m in Barclays GlobalAccess Emerging Market Equity.