![Idea Of The Week: Funds To Capture Opportunities In Emerging Markets! [31 Mar 17] | Open a FREE FSM account and manage all your investments conveniently in ONE place](articleFiles/webarticles/defaultThumbnail/article-img.png)
Emerging markets year-to-date have been on a good run, as the benchmark MSCI Emerging Markets Index posted a 8.75% gain in SGD terms thus far (as of 30 March 2017). Buoyed by a combination of improving economic data stemming from various emerging markets like China, corporate earnings estimates across the space have improved (shown in Chart 1 below) and have seen gradual broad-based upgrades since 4Q 16. And despite its performance, the space still trades at relatively attractive valuations, offering opportunities for bargain-savvy investors. In this "Idea of the Week" segment, we highlight some funds for you to capture the exciting opportunities in emerging markets.
Chart 1: Emerging Markets' Earnings Estimates Trend Improving
Emerging Market Equity Funds
The decent run in emerging markets year-to-date has enabled emerging market funds on our platform to record an average gain of 8.16% (as represented by the FSMI – Emerging Markets Equity index). Over the past 5 years since 2012, several emerging market equity funds that we carry on FSMOne have also outperformed the benchmark emerging markets index. As shown in Chart 2 below, the MSCI Emerging Markets Index is illustrated with the dark blue line, followed by the Wells Fargo Emerging Market Equity Income Fund, Fidelity Emerging Market Fund, Stewart Investors Global Emerging Markets Leaders, and the BGF Emerging Markets Equity Income Fund. Respectively, they have posted an annualised return of 5.72%, 7.14%, 6.60% and 6.85% since end-June 2012, beating the benchmark’s 5.54% annualised gain (as of 29 March 2017).
Chart 2: Performance Of Selected EM Equity Funds' Since June 2012
Wells Fargo EM Equity Income Fund
Our recommended fund for the emerging market equity segment, the Wells Fargo EM Equity Income A USD Acc is an equity fund that seeks long term capital appreciation and income via investing in equities of emerging market companies. Managed by Anthony Cragg and Alison Shimada, the team is based in both the US and in Singapore, and believes that rigorous, fundamental search from both a top-down and bottom-up perspective is key to successfully investing in emerging market equities. The team focuses on identifying companies with strong business models, robust corporate governance, sustainable cash flow generation with the potential for sustainable high dividend yield and earnings potential at reasonable valuations.
Since its launch at the end of June 2012, the fund has generated a 30.28% total return in SGD terms for investors, outperforming the benchmark MSCI Emerging Markets Index in the process as well. Wells Fargo EM Equity Income A USD Acc has also consistently posted lower volatility levels than its benchmark, with a 3-year annualised volatility of 9.4 as compared to the benchmark’s 11.9 (see Table 1 below). In fact, the fund has the lowest volatility among its other peers highlighted in this “Idea of the Week”! The strategy is also available in a distribution share class (the Wells Fargo EM Equity Income A USD Dist) for investors who desire a monthly pay-out feature.
The fund’s strong and steady outperformance is a credit to the manager’s stock picking ability and bottom-up approach which it guided is the primary reason for some sector or country overweight/underweight positions, rather than the converse. Apart from offering investors strong returns and well-managed risk, the fund also possess a low expense ratio (a function of the modest annual management fee of 1.125%), making it appealing to cost-conscious investors who are also looking for a good long-term track record.
Fidelity Emerging Market Fund
Managed by UK-based portfolio manager Nick Price from Fidelity’s global emerging market equity team, the Fidelity Emerging Market Fund A SGD stands out among the rest of its peers as being known for displaying a relatively high degree of active management historically and a fairly agnostic approach when it comes to managing the strategy relative to its benchmark. Employing an investment style that favours higher quality, well-capitalised companies with attractive valuations, the fund has posted a total return of 38.79% in SGD terms since end-June 2012. The fund’s performance also benefited from off-benchmark allocations – the manager had an allocation to Nigerian equities in late-2013 and 2014, which benefited the overall performance of the strategy back then.
As of end-January 2017, the Fidelity Emerging Market Fund A SGD is overweight South Africa, Russia and India, and underweight China, Taiwan, Brazil and South Korea in its geographic exposures, and from a sector level the fund has totally no exposure to the telecommunications and real estate sector. The fund’s factsheet also revealed that the manager counts stocks such as Russia’s Sberbank, India’s HDFC Bank, Baidu and Steinhoff International Holdings as its 10 largest constituents, with them in total comprising 43.0% of the entire portfolio’s exposure. Despite its relatively high conviction approach, the fund has also historically posted lower volatility levels than its benchmark index (see Table 1 below). For investors willing to go with such a management style, the Fidelity Emerging Market Fund A SGD is a viable option for you to capture the exciting opportunities that emerging markets offer.
BGF Emerging Markets Equity Income Fund
The Blackrock Emerging Mkts Eqty Inc A2 USD from BlackRock seeks an above average income without sacrificing long term capital growth by investing at least 70% of its assets in the equity markets of emerging markets. Managed by London-based portfolio manager Dhiren Shah, the fund pursues a quality-driven total return strategy by focusing on dividend growth and dividend yield when finding suitable candidates for the portfolio, believing them to be a proxy for management’s ability to deliver sustainable growth and more stable shareholder returns to capital. The managers also adopt a benchmark agnostic portfolio construction approach, allowing them greater flexibility to express longer-term, high conviction views, with an expected 50 to 80 holdings in the portfolio at any one point of time.
Year-to-date, the fund’s overweight to Indian and Brazilian equities have contributed to the strategy’s performance as both markets have seen rather strong performance. Since end-June 2012, the fund has posted a 36.99% total return in SGD terms (6.85% annualised return), clearly outperforming the MSCI Emerging Markets Index. Over the past 3 years, the fund recorded the highest performance with a 6.0% 3-year annualised return, with volatility levels in line with its peers (see Table 1 below).
Table 1: Volatility Over The Past 3 Years
| 3-Month | 6-Month | 1-Year | 2-Year | 3-Year | ||
| Wells Fargo EM Equity Income A USD Acc | 1.7% | 12.0 | 26.2 | 11.1 | 9.7 | |
| Fidelity Emerging Market Fund A SGD | 8.0% | 10.8 | 30.8 | 11.6 | 16.1 | |
| Stewart Investors Glb Emg Mkts Leaders Fd | 2.7% | 6.6 | 11.9 | 10.2 | 7.3 | |
| Blackrock Emerging Mkts Eqty Inc A6 USD | 3.2% | 7.5% | 6.5% | 11.0% | 10.4% | |
| MSCI Emerging Markets Index | 2.0% | 6.4% | 6.7% | 13.2% | 11.9% | |
| Source: Bloomberg, iFAST Compilations. Annualised volatility; data as of 29 March 2017 |
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Other Ways To Capture Opportunities In EMs!
For investors who prefer a more concentrated or focused approach of capturing the return potential of emerging markets, they can consider going for a regional approach Asia ex Japan equity funds (which we highlighted last week). For emerging markets excluding the Asian region, we also offer Latin American equity funds, Southeast Asian equity funds as well as funds invested in equities in the Emerging European, Middle East and African (EEMEA) region. Investors can also consider single country equity funds for dedicated exposure.
If you are unsure where to begin in your fund picking, our Recommended Funds list would be a great place to start! If you are interested to invest but do not want the hassle of doing it all by yourself, why not consider our newly-launched service: FSM MAPS? Let our portfolio management team devise your asset allocation, keep track of financial market developments and pick the appropriate and optimal products for your portfolio! You may start by doing up a questionnaire!
For further enquiries, kindly contact our warm and friendly investment advisory team!
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