Canaccord Genuity Wealth Management removed its exposure to all emerging market-specific funds this year as part of its portfolio response to the coronavirus pandemic, with the firm now favouring thematic and globally-focused vehicles in building exposure to emerging economies.
The changes reflect a shift in sentiment at Canaccord, which is now of the conviction that emerging market funds or country-specific vehicles fail to provide adequate exposure to key themes and the fortunes of underlying economies, while exposing investors to greater downside risk.
Investment director and head of ESG investments Patrick Thomas told Investment Week the decision was made in response to the pandemic "on the basis that emerging economies are going to find life tougher", and on the assessment that "emerging market vehicles may not be the best way to express" Canaccord's key themes of technology, health and ESG.
Thomas gave the example of a "dedicated position in India" the firm had held for some time, but was dumped from portfolios this year.
He explained: "We still think India, from a macro perspective over the next decade, is going to be incredibly interesting. But just how much value an Indian fund adds to a portfolio is debatable.
"We no longer think you need to have a dedicated India fund in there because your dedicated India fund is not necessarily that correlated to the fortunes of the Indian economy."
In terms of this "increasing dislocation of a country's growth rate and its underlying market", Thomas also cited China, which while "growing at around 6% per annum for the last decade", this "has not been reflected in returns from owning China funds".
He added: "Chinese companies or emerging market companies should be owned in the context of a theme that you like, rather than making a bet on the country dynamic.
"For us, getting exposure to China is about technology, rather than taking a particular view on Chinese growth rates, versus other nations."
In terms of regional funds, Thomas noted that the "really consistent Asia funds" of recent years, such as First State Asia, have "almost taken an implicit bet against China", so investors looking to gain exposure to China have lacked this in Asia funds over "the past four or five years".
He added: "The way of thinking about emerging markets needs to change a little bit. If you look at the performance of emerging markets funds versus developed market funds, you have got almost a decade of underperformance.
"If you look at the relative performance of the MSCI World versus the MSCI Emerging Markets indices, the drawdown potential [of the latter] is significant.
"The MSCI EM has a heavy weighting towards China and a heavy weighting towards technology, which has increased to around 30% of the index from around 10% ten years ago.
"Increasingly EM is a play on technology. And if that is what you are interested in and wanting to gain exposure to, you are better off doing that through a talented global or thematic manager than through a fund manager that probably has to diversify a lot more within emerging markets."
Thomas highlighted several funds as offering better value to investors looking for EM exposure, such as the Monk investment trust and Ballie Gifford Scottish Mortgage, both of which are both "heavily looking at the rise of the EM consumer" and how they "interact with technology".
In addition, Thomas said the Lindsell Train and Fundsmith investment trusts are examples of "high quality global managers", who while not holding EM stocks build are interested in "company-wide" revenue and therefore hold "very impressive consumer brands deriving a lot of revenues from emerging markets".
He added: "The idea that you need to be directly invested in emerging markets to fully capture emerging market revenue changes is incorrect."