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Are regional emerging market funds making a comeback?

Emerging market equities is one of the few asset classes where investors are still seeing value, but as the asset class makes a comeback investors have different takes on whether to allocate to regional funds or leave geographical allocation to portfolio managers.


Jessica Tasman-Jones

According to Morningstar data on European-domiciled funds, emerging market equity categories attracted €38.4bn (£33.9bn) in the year ended January 2018 with the bulk of that, €24.7bn, going into global emerging markets funds.

But not all investors like to leave their geographical allocation up to the fund manager.

Jupiter Merlin head of strategy John Chatfeild-Roberts has long advocated using regional funds to allocate emerging markets in order to access the most attractive regions rather than every market within the sector.

“Have I ever bought a GEM fund? I must have in the past at some stage, but generally not.” However, Chatfeild-Roberts adds “in investment one should never say never”.

The Sicav range, headed by Algy Smith-Maxwell, introduced Jupiter Global Emerging Markets, managed by Ross Teverson, around a year ago.

Asia dominates

The Jupiter Merlin Growth fund currently holds 8.1% in Asia and emerging markets, while the Worldwide portfolio holds 14.5% in the asset class.

The Invesco Perpetual Asian fund, managed by William Lam, which was introduced to the portfolios in February, and Stewart Investors Asia Pacific Leaders account for most of the allocation, alongside a small holding in Findlay Park Latin American.

In contrast, Tilney likes to trust the judgement of its selected fund managers to allocate where they see the greatest opportunities, says managing director Jason Hollands.

It invests in Fidelity Emerging Markets, managed by Nick Price, and Somerset Emerging Markets Dividend Growth. However, it also has allocations to Asia funds, which invest across developed and emerging markets, including First State Asia Focus, Schroder Asian Alpha Plus and Stewart Investors Asia Pacific Leaders.

Asia ex-Japan equity was the most popular type of regional fund within emerging markets over the last year, attracting €9.5bn, according to Morningstar data, and China was the most popular country category, landing €1.5bn into A-shares funds, €479m into Greater China funds and €20m in straight China equity funds.

However, the worst performing regional fund category was Asia Pacific incl Japan, which suffered outflows of €3.5bn over the 12-month period to January.

Portfolio kickers

Neptune India fund manager Kunal Desai says investors tell him they have a core allocation to emerging markets through a global fund and use individual market kickers as a boost to their portfolios.

Desai says India has a lower correlation than some of the “classic” emerging markets, which is helpful for diversification.

“This is because it’s a commodities importer and it’s also very domestically driven. What Trump decides to tweet at 4am in the morning doesn’t have any impact on its growth trajectory,” he says.

India has been one of the few regional funds that have attracted Chelsea Financial Services clients’ interests over the last three to four years, according to managing director Darius McDermott, with Goldman Sachs India and Jupiter India particular favourites.

India was the second most popular country after China over the last year, attracting €1.8bn, according to Morningstar.

Chatfeild-Roberts notes the recently added Invesco Perpetual Asian fund holds relatively less in India than the Stewart Investors Asia Pacific Leaders fund, with 7.9% in the former and 31.3% in the latter.

Return to favour

“Emerging markets have been very unloved, particularly regional funds and they are starting to gain more interest,” McDermott says.

McDermott says whether they choose regional or global emerging market funds in the Chelsea Managed Funds range varies depending on the risk profile.

“We’ve got a small allocation in our Cautious portfolio to the Henderson Global Emerging Markets fund. Because we know the manager is not a heavily momentum, growth-driven fund, it’s always going to take care on valuations.

“In our Aggressive Growth fund, which is our global fund, we don’t mind having direct exposure to Latin America or China or wherever is appropriate.”

The Aggressive Growth fund has 16.2% in Asia ex-Japan and a further 5.7% in the remaining emerging markets.

Hollands says Tilney is currently “relatively positive” on emerging markets as a whole, particularly on valuation grounds.

“However, there are clearly risks to a constructive scenario with some of the recent data coming out of China disappointing and, of course, the prospect of a trade war with the US, which could hurt emerging markets,” Hollands says.

Chatfeild-Roberts describes his view on emerging markets more cautiously as “neutral to negative”, but says he is not particularly positive on any asset class at the moment.