Newton Global Emerging Markets, Invesco Perpetual Global Emerging Markets and Baillie Gifford Emerging Markets Leading Companies are among some of the funds within the IA Global Emerging Markets sector to offer investors the lowest charges and strongest active management skills over the last five years, according to research from FE Trustnet.
This is the fourth article in a series which, shining the spotlight on each Investment Association equity sector, calculates the average fund’s five-year alpha generation, information ratio and total return relative to the MSCI Emerging Markets index (not including passive or institutional-only funds).
Previously we have explored the UK, global and European funds that have boasted the lowest charges and have maximised alpha generation.
After whittling the list down to the funds that managed to beat the average scores on these metrics while maintaining a below-average ongoing charges figure (OCF), we then ‘double-distilled’ the data by re-running the averages to find the very cheapest funds which have achieved strong above-benchmark returns as a result of genuinely active management.
Out of 67 active and broadly-available funds with five-year track records in the sector, just three managed to survive our filters.
Out of these, the fund with the lowest OCF at 0.85 per cent (the average ‘double-distilled’ OCF came out at 1.02 per cent) is Baillie Gifford Emerging Markets Leading Companies, which has five FE Crowns and is headed up by Will Sutcliffe.
Over five years, the £488m fund has outperformed its average peer and MSCI Emerging Markets benchmark by 29.55 and 26.09 percentage points respectively with a total return of 79.64 per cent. It has done so with a top-quartile Sharpe ratio (which measures risk-adjusted returns) and downside risk ratio (which predicts susceptibility to lose money during falling markets) and with a second-quartile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times).
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Over this time frame, it has also achieved an alpha generation of 3.85 which means that, if the benchmark is presumed to have a return of zero, it would have generated 3.85 per cent of additional upside.
It also has an information ratio – which measures the degree to which a manager uses skill and knowledge to enhance returns – of 0.54. According to FE Analytics, an information ratio above 0.5 is ‘good’, above 0.75 is ‘very good’ and 1 is ‘outstanding’.
Sutcliffe aims to achieve attractive long-term growth through a portfolio of between 40 and 80 stocks. These are chosen based on at least a five-year time horizon and are selected using fundamental, bottom-up analysis. Examples of its largest individual holdings include the likes of Samsung Electronics, Tencent and Taiwan Semiconductor Manufacturing Company. Its largest regional weightings are China at 29.9 per cent, Taiwan at 18.7 per cent and South Korea at 17 per cent.
Next up for its low charges and strong, above-benchmark returns is Newton Global Emerging Markets, which has an OCF of 0.95 per cent.
Out of the three funds on the list, this five crown-rated fund has the highest five-year total return of 95.53 per cent (which is also the third-highest total return in the whole sector) and the highest alpha generation of 6.65. It has the second-highest information ratio at 0.7. It also has a top-quartile Sharpe ratio and maximum drawdown, but has a third-quartile downside risk ratio over five years.
Manager Rob Marshall-Lee aims to provide long-term capital growth through Newton’s well-known thematic approach to investing, which focuses on forces of change and where we are in market cycle.
On a bottom-up level, he focuses on high-quality businesses with strong corporate governance and the ability to generate high returns on capital. Its largest holdings include Indian IT service management company Vakrangee, Hong-Kong-based life insurance group AIA Group and South Korean storage battery manufacturing firm Samsung SDI Co.
In terms of region, its largest weighting is India 30.4 per cent – a significant overweight relative to the benchmark – followed by China at 22.8 per cent, South Africa at 10.8 per cent and South Korea at 6.5 per cent. The fact its regional weightings differ significantly from the benchmark could be the result of its concentrated portfolio – nine of the top 10 stocks account for more than 4 per cent of the portfolio each.
The third and final fund to make the grade when it comes to its alpha generation, total return and OCF is the four crown-rated Invesco Perpetual Global Emerging Markets fund.
Headed up by Dean Newman, the £356m fund has a five-year alpha generation relative to the MSCI Emerging Markets index of 4.73, an information ratio of 0.85 and an OCF of 1 per cent.
Over five years, the fund has returned 85.81 per cent compared to its average peer’s return of 50.09 per cent and the MSCI Emerging Markets index’s return 53.55 per cent. It has done so with a top-quartile maximum drawdown, Sharpe ratio and downside risk ratio.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Newman aims to provide long-term growth through individual stock selection, focusing on companies with dominant positons within their respective markets which are well-run and offer high returns on invested capital.
The manager is currently finding the EMEA regions (Europe, the Middle East and Africa) to be particularly rich hunting grounds as he believes they offer a diversified range of well-run companies operating in areas of growth.
Its largest individual holdings though include Samsung Electronics, South African media company Naspers and Taiwan Semiconductor Manufacturing Company. These are three of 69 stocks currently held in the portfolio, with Samsung accounting for 6.83 per cent of the overall fund.
While these are the only three funds to have made it past all of our filters, GS Emerging Markets CORE Equity Portfolio made the cut on every metric apart from its alpha generation of 2.21.
The four crown-rated fund, which is managed using a team approach, also has a five-year information ratio of 0.84 and an OCF of 0.92 per cent.
Over five years, the Luxembourg-domiciled Sicav has outperformed its average peer and benchmark by 25.46 and 21.27 percentage points respectively with a total return of 78.29 per cent. It has done so with a top-quartile maximum drawdown and Sharpe ratio, as well as a second-quartile downside risk ratio.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
GS Emerging Markets CORE Equity Portfolio aims to outperform its benchmark while holding a portfolio of companies possessing the same style, sector, risk and capitalisation characteristics of the index.
It has a highly-diversified portfolio of 191 stocks and has a 72.4 per cent regional allocation to Asia ex Japan, a 15.5 per cent allocation to Latin America and 12.1 per cent to the EMEA regions.