Fund buyers back emerging markets funds as Canaccord switches out exposure
Comparatively low returns no deterrent for investors
Fund analysts and buyers are not set to "write off emerging market funds just yet" despite underperformance relative to developed market peers over the past decade and a growing preference for exposure to key investment trends through thematic vehicles.
It follows the recent move from Canaccord Genuity Wealth Management to entirely eliminate its portfolios' exposure to emerging market and country-specific funds as part of its repositioning in the wake of the coronavirus sell-off, as revealed by Investment Week in August.
The £25.9bn AUM wealth firm now uses global and thematic funds to gain emerging market exposure, utilitising its three preferred themes of technology, health and ESG, through funds and investment trusts such as Baillie Gifford's Monks and Scottish Mortgage.
Central to Canaccord's decision, according to investment director and head of ESG investments Patrick Thomas, is an "increasing dislocation of a country's growth rate and its underlying market".
Thomas cited China where the country's annual growth rate over recent decades "has not been reflected in returns from owning China funds".
International Monetary Fund data shows that Chinese GDP grew at an average of 6.7% per annum in the decade before 2020. Managers in the IA China/Greater China sector meanwhile have averaged an annualised return of 9.4%.
In addition, Thomas referenced "almost a decade of underperformance" between emerging market funds and their developed market peers.
In the ten years to 24 August, the IA Global sector average has returned 164.3%, compared to the IA Global Emerging Market sector's return of 57.2%, according to data from FE fundinfo.
The IA Global sector has also managed to outperform the MSCI World index's total return of 100.4% over the same period, while the IA GEM sector has underperformed the MSCI Emerging Markets index's gains of 71.4% over the same period.
"The way of thinking about emerging markets needs to change," Thomas said.
Key themes
While Canaccord now has a preference for building exposure to key themes such as the emerging market consumer through funds holding "very impressive consumer brands deriving a lot of revenues from emerging markets", other buyers believe EM funds are well placed to benefit from such key drivers ofEM growth.
Managing director of FundCalibre Darius McDermott, who was one of a number of fund buyers who said they "would not write off emerging markets funds just yet", named Aubrey Global Emerging Markets as an example of a fund demonstrating "spectacular performance" which "has honed into the structural growth story of the EM consumer in particular".
Cannacord's decision reflects the growing popularity of thematic funds, which have increased from approximately 0.1% of total equity fund assets ten years ago to around 1% today, according to Morningstar.
While the MSCI EM index and the IA GEM sector have respective weightings of 18.4% and 30.9% to technology, Canaccord now has a preference towards more targeted ways of gaining exposure towards the sector, which is set to remain a crucial driver of returns in emerging markets, through thematic vehicles.
Emerging markets and the 'looming spectre' of rising inflation
However, head of investment fund research at Quilter Cheviot Nick Wood said "there are plenty of EM managers thinking from a thematic point of view".
Wood said Quilter Cheviot holding Fidelity China Consumer was an example of a fund "focusing on the holding companies which have a consumer bias one way or another, not just to the staples or technology, for example".
He added: "It has a wide field but also clearly will avoid a number of less interesting areas of the market. Within emerging markets, Chinese consumers is one of the long-term key drivers."
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