Theme and geographic asset allocation have both contributed to the best performing fund returns in t...
Theme and geographic asset allocation have both contributed to the best performing fund returns in the global emerging markets sector over the past three years.
For the 36 months to February 2000 the average total return for the 28-strong Micropal unit trust sector was 12.54%. Those portfolios which were underweight Asia ahead of the 1997 crisis and timed their entry into technology and telecom stocks correctly last year have produced far higher figures.
One such example would be the £14m Baillie Gifford Emerging Markets Growth Fund which managed a total return of 48.8% over the period.
The portfolio is managed by Gerald Smith, who heads up the team covering the world's emerging markets withing Asia Pacific, Latin America, the Middle East, Africa and Eastern Europe.
Smith said: "Those areas are pooled to form the emerging markets policy committee which invests the Baillie Gifford Emerging Markets Fund."
The portfolio is managed as a stock picking rather than an asset allocation vehicle but even so this has translated into quite strong asset allocation plays.
Smith said a major change over the past year had been the move to a positive position on Asia after being underweight in this market. This overweight position was taken at the expense of Latin America and Europe.
Baillie Gifford's three year total return of 48.8% has come as the result of producing a 134.69% return in the 12 months to February 2000, the highest in the sector. In the discrete yearly period to February 1999 it had produced -32.11% and in the year before, 6.61%.
While some of these figures are in negative territory they still represent consist outperformance of the peer group as a whole. In the year to February 1998 the sector returned -7.55%, in the subsequent discrete yearly period the figure was -32.61%. Last year to February 2000 the average return was 76.61%.
The Baillie Gifford fund runs a portfolio of around 120 stocks and Smith said this has contributed to the below average volatility of the fund. It has an annualised standard deviation (ASD) of 9.53%, below the sector average of 10.10%. He said the group also tried to steer clear of taking large country bets, which was another factor behind its low volatility.
The main investment process is to find good companies at attractive prices. After selecting stocks, the team will compare the portfolio against the MSCI Emerging Markets Free Index to ensure the scale of differences from the index reflect the strength of its convictions and may then scale allocations up or down accordingly. The fund has the second highest monthly alpha in the sector at 0.82 against an average 0.04, and one of the lower betas at 0.94, compared with 1.01 for the sector.
While the returns and comparatively low volatility generated by the Baillie Gifford fund are impressive, they are overshadowed by the Aberdeen Frontier Markets unit trust. Run by Andrew Elder, the portfolio invests in emerging Europe, Africa and the Middle East rather than across the asset class as a whole.
This fund has the highest alpha and lowest beta in the entire sector, at 1.29 and 0.73 respectively and has one of the lowest ASDs at 8.45%, beaten only by Five Arrows Emerging Markets Portfolio at 8.33% and City of London Emerging Markets at 8.13%.
Like Baillie Gifford the portfolio has outperformed in of the three each discrete yearly periods over the 36 months to February 2000. Up to February 1998 it returned 13.4%, the only positive return in the sector. In the following 12 months it returned -13.53, again the top performer, and in the year to February 2000 it managed 70.42%. This was just below the 76.61% sector average.
The £38.4m Gartmore Emerging Markets Fund has also produced above average performance over the three years, returning 30.38%, and below average ASD at 9.69%
Philip Ehrmann, fund manager at Gartmore, said the portfolio is invested from a bottom up perspective, taking into account the sectoral influences and the wider macro-economic factors, with input from Gartmore's global research team.
To help control volatility, the fund has a tracking error of 5-8% against the IFC Investables Index. Against this, the fund will not be more than 50% overweight or underweight against the major geographical areas, and no more than three times overweight or underweight the smaller areas. If confident on a particular company, the stock will be heavily weighted, no matter its representation in the index.
There are currently 88 stocks in the portfolio, which has been broadened out over the last few months from about 65 holdings. The main areas where this broadening has occurred have been in Turkey, due to the fall in interest rates, and in Russia, as a result of increased political and market stability.
From both a bottom up and top down perspective, the portfolio is currently most positive geographically on Brazil due to continued recovery, and in Korea because of its promising stock prospects. Ehrmann is underweight Greece, due to extreme valuations and in South Africa. From a macro perspective, the South African market continues to be unfavourable, because of interest rates of around 15% and the lack of ability for companies to compete globally.
From a sector point of view, the Gartmore fund is most overweight telecoms. Ehrmann added: "We also have significant exposure to technology and aim to focus on areas which offer the best comparative value. For this reason we are very excited on Taiwan and to a lesser extent Korea, which are both major semiconductor producers and will continue to enjoy growth in this market.
"At a sector level we are underweight in some of the big cyclical companies like steel producers and commodity players, for example copper."
Ehrmann attributes the strong performance to managing to avoid most of the poor performing markets, by being underweight in Indonesia, Thailand and the
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