Newton Global Emerging Markets, Neptune Emerging Markets and Baillie Gifford Emerging Markets Leading Companies are among some of the best stockpicking funds offering strong-stomached investors the biggest gains away from the index over the last five years, according to data from FE Analytics.
This is the third instalment of the series, having previously focused on UK and global equity funds which have generated strong returns away from their respective benchmarks over five years, but have done so with significantly higher levels of volatility.
The premise came from a recent article featuring Architas’s Adrian Lowcock, who explained that volatility can actually be a sign that the manager is investing differently from an index.
As such, we decided to look at the funds exhibiting high levels of active management which have achieved strong returns over five years, but which would require the ability to look through short-term fluctuations in performance.
To do so, we filtered through the emerging market equity funds which, relative to the MSCI Emerging Markets index, are in the top two quartiles for their five-year alpha generation (which measures returns made in addition to a benchmark), beta (which measures sensitivity to benchmark movements – the higher the quartile, the lower the beta) and information ratio (which assesses the degree to which a manager uses skill and knowledge to enhance the fund returns).
We also only included funds that are in the bottom two quartiles for their five-year r-squared ratio (which measures how closely correlated a fund is to a benchmark), tracking error (which measures a fund’s excess returns over the returns of an index) and, of course, its annualised volatility.
Out of 78 funds with five-year track records in the IA Global Emerging Markets sector, only five passed through our filters, as shown below.
Source: FE Analytics
Of these, the fund with the highest five-year total return at 91.59 per cent is Newton Global Emerging Markets.
Headed up by Rob Marshall-Lee, the five FE Crown-rated fund has an annualised volatility of 15.09 per cent over this time frame (compared to the MSCI Emerging Markets index’s volatility of 14.43 per cent).
As with all Newton funds, Marshall-Lee adopts a thematic approach to investing and combines this with bottom-up stock selection. When choosing companies, he focuses on high-quality businesses with good corporate governance and the ability to generate strong returns on capital.
Examples of the fund’s largest individual holdings include Indian IT service management company Vakrangee, Chilean chemical company Sociedad Quimica y Minera and battery manufacturing subsidiary of Samsung, Samsung SDI.
The fund has a 25 per cent regional allocation to both India and China respectively. The remaining 50 per cent of the portfolio is held across several countries including South Africa, Mexico, South Korea and the Philippines.
Next up with a total return of 81.89 per cent over five years is Baillie Gifford Emerging Markets Growth, which has an annualised volatility of 14.77 per cent over the same time frame.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The four crown-rated fund has been headed up by Richard Sneller and Mike Gush since 2005 and 2015 respectively, who aim to invest in stocks which generate superior long-term growth through having a competitive advantage.
Part of their investment process is looking through short-term market noise to identify under-researched and high-growth companies, which may contribute to the fund’s higher-than-average volatility.
Examples of the £708m fund’s largest holdings include Tencent, Samsung Electronics, Alibaba and Taiwan Semiconductor Manufacturing Company.
Baillie Gifford Emerging Markets Growth is one of two funds from the firm to have won a spot on our list.
The second, Baillie Gifford Emerging Markets Leading Companies, has five FE Crowns and is headed up by Will Sutcliffe. It is slightly more concentrated than the former, with its top 10 holdings accounting for 53.9 per cent of the overall portfolio as opposed to 44.5 per cent.
Managers across different sectors and regions at Baillie Gifford regularly share ideas with their colleagues and, as such, investors should be unsurprised that the fund also has Samsung, Taiwan Semiconductor Manufacturing Company, Tencent and Alibaba as its four largest holdings.
Over five years, the £475m fund has outperformed its average peer and benchmark by 30.79 and 27.8 percentage points respectively with a total return of 79.5 per cent. It has done so with an annualised volatility of 14.97 per cent.
Again, the fund is constructed using a bottom-up stock selection process, with a focus on high-growth yet overlooked companies which can grow strongly over the long term.
The only other five crown-rated fund remaining on the list is Neptune Emerging Markets, which has been headed up by Ewan Thompson since 2008.
The fund is seen as a highly-concentrated, ‘best ideas’ portfolio, which also has Robin Geffen, Thomas Smith, Kunal Desai and Ruth Chambers on board as assistant managers. Thompson aims to achieve “powerful” long-term growth, with examples of the £25m fund’s largest holdings including Samsung Electronics, Tencent, Sberbak and Alibaba.
Over five years, the fund has returned 65.08 per cent compared to its average peer and benchmark’s respective returns of 48.71 and 51.7 per cent. It has done so with an annualised volatility of 15.64 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fifth and final fund to have made it onto the list is Allianz Emerging Markets Equity, which has four FE Crowns and has been managed by Kunal Ghosh since 2013.
Over five years, the fund has outperformed its average peer and benchmark by 10.23 and 7.24 percentage points respectively with a total return of 58.94 per cent. It has a five-year annualised volatility of 15.17 per cent.
Ghosh aims to exploit market inefficiencies and incorporates three behavioural biases into his stock selection process: investors, sell-side analysts and company management. Examples of its largest holdings include Tencent, Industrial and Commercial Bank of China and Taiwanese electronics company hon Hai Precision Industry.