global emerging markets portfolio is only fund out of 20 with three-year track records to achieve positive returns over three years
Emerging market funds have shown varied performance over the three years to 30 November, with less than a handful posting positive returns.
Among the 20 funds with three-year track records to 30 November, only First State Global Emerging Markets has made a positive return. Just four out of 23 funds that have been running for more than a year have posted positive returns over 12 months to the same date. The £59.5m First State Global Emerging Markets fund, which has made positive returns to investors over each of the past three years, aims for long-term growth with a focus on quality, according to senior portfolio manager Alan Nesbit.
He said: 'In strong market rebounds, often the companies you expect to go bust perform best in a relief rally. But we won't compromise ourselves by chasing companies with poor financials, even if they might perform quite well in the short term.'
Over the 12 months to the end of November 2000, the fund returned 2.37% against a sector average of -9.06%.
Nesbit believes the strong outperformance was due to underweight positioning in the technology, media and telecoms sector, which fell sharply early in the period.
'During the previous year, we were under pressure to get into tech,' he said. 'But even though we may have some underperformance for a short period, we won't compromise our principles and buy stocks we think are too expensive.'
Over the 12 months to the end of November 2001, the fund returned 2.48% against a sector average fall of 9.76%.
'The key factor in that period was that people became much more risk averse after 11 September, which tends to favour our style of backing quality,' Nesbit said.
Accounting scandals in the US and a series of high-profile corporate failures also helped boost the defensive stocks in which the fund was invested, he added.
As well as being underweight technology, the fund was long on consumer companies such as brewers and retailers during the period, as the typically young populations of emerging market countries favour stocks in the low-ticket consumer sector.
In the 12 months to the end of November 2002, the fund returned 2.37% against a sector average of -3.86%, ranking it the fourth best performing fund for that period.
'We lost a little bit of ground in the past couple of months as there has been more enthusiasm in markets and investors have started to pick up some of the stocks that had been beaten down badly,' Nesbit said.
'Some of the technology companies have been doing extremely well and we don't have the exposure there that some other funds have, particularly among the larger Asian companies.'
The £104.4m Henderson Emerging Market fund has fallen 2.63% over the 12 months to 30 November 2000, against a sector average drop of 9.06%.
Henderson head of emerging markets Divya Mathur said the fund began the period with a focus on aggressive, high-growth stocks, including an overweight position in the tech sector, particularly Indian and Asian internet stocks.
Through the second quarter of 2000, that position was scaled back, allowing the fund to avoid much of the downside that accompanied the bursting of the tech bubble.
The fund was also overweight Turkey, where an anti-inflation program and prospects of EU accession boosted stocks that year.
Over the 12 months to the end of November 2001, the fund returned -7.68% against a sector average of -9.76%, sharply reducing its outperformance.
'We had a very brief rally early in that period after the US cut interest rates for the first time and, unfortunately, we were underweight Asia, which did quite well at the time,' Nesbit said.
The fund was also overweight Mexico, Russia and China and underweight Argentina, Brazil and Turkey. This last positioning coincided with a rapid rise in interest rates that was designed to protect the Turkish currency but had an adverse effect on equities.
In the 12-month period to the end of November 2002, the fund slipped into underperformance, returning -9.67% against a sector average of -3.86%.
Mathur said the downturn in the fund's fortunes was due to several erroneous country calls, including a large overweight position in Turkey early in the period, when political instability led to sharp falls of around 40% in dollar terms in Turkish markets.
The fund also missed out on strong performance in the Indonesian and Malaysian markets via underweight positions, with Korea, its only overweight within Asia.
In addition, it failed to take a sufficient overweight position in Russia to make the most of bullish markets there.
'The risk premium has evaporated in Russia because it now has good political and fiscal stability and the oil price is helping the country a lot,' he said.
The £12.5m Invesco Perpetual Emerging Countries fund was one of the worst performers in the sector over the three years to 30 November, returning -29.42% against a sector average of -21.83%.
Fund manager David Manuel blamed the underperformance on investor risk aversion. 'When risk aversion has dropped, our stock picking has been vindicated as we outperform when investors focus on fundamentals,' he said. 'But over the past few years, risk aversion has risen significantly.'
In the 12 months to the end of November 2000, the fund returned -15.43% against a sector average of -9.06%.
During the period, it moved into Chinese and Indian companies that were benefiting from the trend towards outsourcing of manufacturing, as well as highly populated countries such as China and Turkey, to gain exposure to a critical mass of domestic spending growth.
Corporate governance concerns in Russia and Turkey and the global economic slowdown started to hurt the fund's performance in the latter part of the period, Manuel said. Over the 12 months to the end of November 2001, it returned -10.72% against a sector average of -9.76%.
Manuel noted the fund was positioned for an upturn in global economic activity when the 11 September terrorist attacks on the US dramatically changed the outlook for a global recovery.
The portfolio was hit quite badly by the fall in investor confidence and the rolling-back of recovery expectations, he said, although the managers felt their stock weightings were relatively sound.
In the 12 months to the end of November 2002, the fund returned -6.52% against a sector average of -3.86%, while it continued to wait for the impact of the US interest rate cuts to boost global economic growth.
'We are positioned for recovery, so we haven't got a great risk of underperforming while the index continues to tread water,' he added.
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