baillie gifford, first state and aberdeen are the only groups in the global emerging markets sector to have outperformed over three years
Investors with money in global emerging markets are mostly sitting on double digit losses after a difficult three years for the sector.
Global emerging market funds have on average posted losses of 10.25% over the three years to the end of June, on a bid-to-bid basis. Of the 21 funds in the sector with three year track records, only three have delivered positive growth over that timeframe, equivalent to just 15% of the overall universe.
Baillie Gifford and First State's global emerging markets funds, along with Aberdeen Emerging Markets ended the term in positive territory. Moreover, only Aberdeen managed to deliver positive returns in two of the past three discrete years, with recent launches by Five Arrows and Credit Suisse the only other vehicles to make gains over 12 months.
The three top-performing funds are also among the least correlated to the benchmark in the sector and generated the most alpha in the process. Baillie Gifford, First State and Aberdeen's funds delivered an average alpha score of 10.39% compared to a 1.78% sector average. First State and Aberdeen achieved this with the sector's lowest beta scores, of 0.75 and 0.79 respectively, compared to a peer group average of 0.89, indicative of strong risk-adjusted return scores.
A point worth noting is the two top-performing funds came out of smaller fund management houses, in Baillie Gifford and First State, while many of the larger houses with their huge teams of global analysts fell by the wayside. The four worst performing funds were managed by four of the largest groups, namely Schroders, Invesco-Perpetual, Scottish Widows and Merrill Lynch, proving size is not everything.
Aberdeen Emerging markets, managed by Hugh Young, has consistently outperformed in each of the last three discrete years.
Shahreza Yusof, emerging markets fund manager at Aberdeen, said although benchmark aware, the fund is run very much on a bottom-up basis, with few bets being taken on the macro level.
Yusof said: 'The main reason the fund has done so well over the past three years is stock selection. The biggest market blow-out over the past couple of years has been technology and the fund has been very underweight technology and Taiwan, which is a large part of the index, over this time.
'We are not very adventurous on the macro side, with asset allocation generally in line with the index, with a slight overweighting of Asia. It is stock selection that has delivered the outperformance.'
Over the 12 months to the end of June, the fund is up 0.34% compared to a sector average 7.88% drop. Yusof said besides the heavy underweighting of technology and the high beta technology-heavy Taiwanese market, the positive return was a result of exposure to smaller, non-correlated markets. This includes exposure to Indonesia and Sri Lanka, two of the strongest performers year to date, as well as larger successes such as Korea and Russia.
Looking forward, Yusof remains bullish on Asia, believing the growth in the regional economy is lessening the region's reliance on the US economy.
The £9m Framlington Emerging Markets fund, managed by Jonathan Asante since the end of 2000, has posted growth of -19.26% over the three years to the end of June, compared to the sector average of -10.25%.
Since taking charge of the fund last year, Asante reduced the number of holdings in the portfolio from around 100 to 70, enabling him to take larger stock bets.
Asante said: 'Stock selection is a mix of top-down and bottom-up analysis and we look to add value 50-50. We start off with top down and run off four factors: global growth forecasts, the oil price, risk premium and the yield curve.
'Some sectors are very global, so if global growth is revised down, we don't want to be in markets such as Taiwan and Korea. Oil prices can have a large impact on some countries balance of payments.'
He added that analysis of the risk premium of individual markets and study of countries' yield curves give an accurate indication of how risk aversion and growth will affect a market in the near to medium term.
The bottom-up stock selection is a process of finding undervalued companies with sustainable earnings growth to fit the macro-driven asset allocation.
In the 12 months from July 2000 through June 2001, the fund posted growth of -26.21% versus a sector average drop of 20.04%. While only in charge of the fund for six of these months, Asante recalled volatility throughout 2001 was severe, with funds moving 20% either way on a near monthly basis and portfolio churn as he reduced the number of holdings having a minor impact.
Over the 12 months to the end of June, he has steered the fund on a path of outperformance, returning -5.89% compared to a sector average of -7.88%.
Asante's top-down view has led him to position the fund very defensively over most of the calendar year after an earlier run by the Asian cyclical economies, but he is now putting money into more beaten down emerging markets as he expects global growth to bottom in the next quarter.
Asante said: 'Asia went up very rapidly at the end of last year amid excitement about a V-shaped recovery. Asian cyclicals went through the roof, so we took profits and moved underweight.
As US interest rates continued to fall, they all collapsed, so that was a core aspect of our outperformance.
'We are very defensive at the moment and overweight defensive and non-correlated markets, such as India. It is a question of where is going down the least, but we are now also overweight risky markets and have a lot in Indonesia, Turkey and Brazil.'
This two-pronged approach is based on the premise that global economic growth is slowing in the near term and as the market turns, those beaten down emerging markets will benefit the most.
Asante said Brazilian government debt is currently yielding over 24%, effectively pricing in default already. Although there are concerns about who will win the pending presidential election, with fears the leading candidate is somewhat protectionist, he said Brazil is unlikely to be allowed to default, whatever the election result, given Citigroup's $12bn exposure to Brazilian debt making a US bailout likely. As such, he sees little downside to Brazil, where valuations are now very low relative to developed markets.
Similarly in Turkey, Asante believes the worst is now over, while the macro situation, given Turkey's strategic positioning in the Middle East, is supportive of a US-led IMF bail out at worst.