Emerging market funds have defied their usual type-casting around risk and volatility to outperform the S&P/ASX 200 index over the past three years, due to smart targeting and a focus on quality.
Only two of the funds that invest the majority of their assets in equities from emerging market countries recorded higher annualised volatility than the S&P/ASX 200 index over the past three years to May 2017, according to Money Management’s analysis based on FE Analytics’ data.
At the same time, just under two thirds of the emerging markets (EM) funds displayed volatility lower than the MSCI Emerging Markets.
According to FE Analytics, the three top performing EM funds over the past there years were BlackRock Global Enhanced Emerging Market which returned 12.4 per cent, BT Institutional Global Emerging Markets Opportunities (10.98 per cent) and Martin Currie Global Emerging Markets (10.75 per cent).
The funds recorded the three-year annualised volatility of 10.45, 11.91 and 10.95, respectively, against the S&P ASX 200 index which saw its three-year annualised volatility of 12.59.
One of the reasons the EM funds were less volatile might be their greater emphasis on investments in higher quality companies within emerging markets.
Zenith Investment Partners’ senior investment analyst, Justin Tay, said: “Typically with the focus on quality as part of their process, these funds will tend to exhibit lower levels of volatility relative to the broad index”.
“Part of the outperformance can be the market closing some of the discount ascribed to emerging markets relative to developed markets since 2011.”
Also, the fundamental data in emerging markets was improving and on top of this there were some risks emerging within developed markets which included political challenges both in the US and Europe.
However, James Syme, a senior fund manager at J O Hambro Capital Management, BT Investment Management’s (BTIM) offshore business which manages its BT Institutional Global Emerging Markets Opportunities, said: “The fund benefited in 2014 and 2015 from being underweight markets such as Brazil and Turkey as well as it had significant exposure to some markets that have done well, such as India which saw a strong domestic growth and Korea which was helped by the strength of its exports.
As far as sectors were concerned, Syme said: “Our focus is predominantly on countries, rather than sectors, but sectors where we found a lot of opportunities during the period have been some of the consumer sectors, including both India and Korea, and the technology sectors (mostly in Korea, Taiwan and China).”
“Our approach to emerging markets is founded on our belief that emerging markets go right or wrong at the country level, and country allocation is an important source of returns for us.”
Asked about the most important macro events that would have the main impact on the emerging market in the future , Syme said: “A recovery in global trade volumes should feed into emerging markets exports, which in turn will boost economic growth, consumption, and equity returns in the emerging markets.”
“It is important to keep a close watch on developments and to expect the unexpected.”
