Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Emerging Markets sector
Emerging markets are vital to the world economy, what with them making most of the world’s stuff. However, jet engines are vital to airplanes, but you probably wouldn’t want to climb in one. The same is probably true for emerging markets, at least while current conditions persist.
It’s been a hard year for equity markets and an even harder one for emerging market equity markets. I last wrote about emerging market equity funds for Moneyfacts in May 2021, when I reported that the consensus was that they should benefit from the post-pandemic take-off in demand, and that even a post-pandemic reversion to mean could serve the sector well into 2022.
Well, it didn’t turn out quite like that, although India, frontier markets, and Middle East and North Africa delivered strong returns over 2021, and India has headed upwards since the summer. Indeed, India and Latin American MSCI indices have both beaten their developed world equivalent over 12 months. Nevertheless, the largest part of the EM index is China, and saving a strong summer bounce and a rally since October, it continues to struggle. Eastern Europe has, of course, plummeted, for obvious reasons.
In May 2021, one-year returns for the IA sector were 37.6%, while three-year returns were 25%. By September, those figures were -10.5% and 10.7% respectively, indicating the tumultuous year for the sector.
There have, of course, been a whole toolbox-worth of spanners thrown in the works, not least persistent supply bottlenecks and property market crises in China to the war in Ukraine. What’s more, if the world does slip into recession, as seems likely, then this will be amplified in emerging markets.
While net flows into the sector were around £2.3bn over the three years to September, net outflows over the three months were £1.9bn, so investors were pessimistic over its prospects, at least in the short term. That said, this is hardly unique to emerging markets, with £4.6bn and £4.7bn being withdrawn from Global and UK All Companies equity funds over the same period.
Struggling to add value
The average IA Global Emerging Markets manager has struggled to add value as the sector average lagged the MSCI Emerging Markets over five and 10 years to September, and by mid-September, the sector was down about 24%, with the MSCI EM index having fallen about 21%. Nevertheless, one doesn’t buy the “average” fund, with returns varying widely across the sector. Three-year returns range from -14.1% to 44.6%.
Only two of the funds in the May 2021 top 10 have weathered the storm to keep their place on the table—BNY Mellon Global Emerging Markets and Carmignac Emergents. Both, however, have very different portfolios, at the holdings, sector, and country level. But then, returns-wise, they’re hardly marching in lockstep.
Three of the funds are index trackers, with two following the MSCI EM Small Cap index, and the other the MSCI SRI EM—a sustainable index.
Where next? The market has fallen, but it can still fall more, of course—and the probability of that is high. When the global economy rebounds, emerging markets generally rebound harder, and will be a good place to be. But the problems that beset the world are far from resolved, suggesting this is a sector that stays on the subs’ bench until they are.
Table 1: Top-Performing Global Emerging Markets Funds Over Three Years (with a minimum five-year history)
All data as of August 31, 2022; Calculations in GBP
Source: Refinitiv Lipper
This article is addapted from the October issue of Moneyfacts, page 19.
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The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
