If one looks at the state of play in the Investment Association’s Global Emerging Markets sector through the Lipper performance tables and compares it with a year and a half ago, it is remarkable how little seems to have changed. Then, as now, the Aviva Investors Emerging Markets Equity Multi Manager fund headed the tables. True, it has slipped back in the shorter timeframes but it is surely deserving of a prize for consistency.
It is the short-term performance where the real contrast with early 2015 becomes
apparent. Back then, emerging markets were out of favour – not as much as in 2013 when even the longer-term tables were delivering negative average performance but, given the stellar performance of the past, these markets looked no better than pedestrian. However, the six months to the end of July this year have seen an average rise of more than 31 per cent, with the top-performing fund gaining nearly 44 per cent.
This is despite the apparent continued slowing of the global economy, growing worries over China’s economic progress and a geopolitical environment that looks increasingly threatening.
The flow of money into these markets has been driven by valuation criteria as much as anything. At the top of the emerging markets boom, shares were trading at eye-watering multiples of earnings, with investors convinced that developing nations were picking up the growth baton from a developed world that was both over-indebted and facing strong demographic headwinds.
But the sharp downturn in global economic activity following the financial crisis unsettled sentiment. While raw material prices were supported to some extent by China’s switch to huge infrastructure projects to underpin growth, even these faded, led by oil, which collapsed in price. With many developing economies dependent on oil, metals and minerals for success, times became much tougher and the situation was hardly helped by a flight to perceived quality as investors sought to de-risk their portfolios.
Although we still face relatively sluggish growth prospects for the world economy, some degree of stabilisation has been achieved and modest rises in commodity prices have taken place. Add to this a steady rise in US equities, which took the S&P 500 Index to new highs in August, and emerging markets have started to look more appealing.
The problem remains, though, that this is a broad constituency, with individual countries dependent on a variety of factors to sustain growth and the wide range of funds using differing investment approaches and geographic distribution to populate their portfolios.
That said, it is encouraging to note the level of consistency among the management groups offering funds in this sector. Aviva and Fidelity have appeared in all the reviews of this sector I have conducted over the past three years.
It is also becoming a more app-ealing place for the management groups to allocate resources. There are 55 funds in the six-month tables – two more than at the beginning of 2015 – but a further 10 funds are listed in the sector without qualifying for inclusion in the performance tables.
The variations between performances also appear to have tightened. While there are still eight funds delivering negative returns over five years, there are none that have lost money in any of the other tables. It is also worth mentioning the Templeton Global Emerging Markets fund, which was tail-end Charlie over five years, losing more than a quarter of its value on a total return basis. Such has been its turnaround in performance that it features in the top five in both the six-month and one-year tables.
There is an old adage in the investment world that markets always over-react – in both directions. This was certainly true of emerging markets back when they were fully in fashion, as overblown valuation levels bear witness. Arguably, they suffered too much and no doubt renewed enthusiasm for the sector will push them too far. Nevertheless they have an overall attraction, with one cav-eat: global upsets are likely to bear more heavily on these markets than on those of the developed world.
Let us hope the next upset is a long way away.