Only one fund in global emerging market sector shows positive returns over a three-year period with the rest reporting losses
The global emerging markets sector has had a difficult past three years, with the majority of funds showing negative returns.
Performance was better for portfolios that invested in countries such as Korea, Thailand, Eastern Europe, Russia, Brazil and Mexico. Funds that suffered the most were due to retail investor outflows that occurred following the bursting of the technology, media and telecommunications (TMT) bubble and the events of 11 September.
The Deltec Emerging Markets Equity fund over a three-year period was ranked second out of 110. The main performance of this portfolio can be attributed in the year 2000.
From April 2000 to March 2001 the portfolio was ranked in the first percentile.
Greg Lesko, managing director of Deltec Bank, says: 'In 2000 the largest exposure was in Brazil as growth was robust in this country and the portfolio was keen on valuations in the telecommunications sector. The regulator was allowing more opportunities in this market.'
Other large weightings included Mexico due to government promises to reform the power sector and the lowering of interest rates. During 2000 Lesko favoured the banking and construction industries in Mexico.
Russia was also a favourite for the Deltec Emerging Markets Equity fund due to the Putin reform process and high oil prices.
In 2001 Lesko started to see risk aversion in the markets. From April 2001 to March 2002 the fund fell to the 15th percentile.
However, the weightings in Mexico and Brazil were maintained. Lesko thought the monopolies held by companies in the telecommunication and construction sectors in Mexico still held good value.
The Deltec Emerging Markets Equity fund started building up weightings in Asia. Lesko thought the electronics industry was performing well in South Korea and started investing in this area. Meanwhile, in Thailand government reforms have helped increase consumer spending and improved the domestic mortgage market.
From April 2002 to March 2003 performance of the fund improved and it was ranked in the ninth percentile.
Deltec maintained an overweight position throughout 2002 in Mexico. Again the focus was on Asia and weightings were slightly increased in Korea and Thailand to market neutral. In 2003 half of the exposure to Korea was sold because Lesko thought the credit cycle had run its course and consumer sentiment was slowing down.
The money was moved into Brazil where the outlook was improving following the outcome of the political election. The exposure to Thailand was maintained due to an increase in consumer confidence and demand for borrowings.
Investment strategy used for the Deltec fund has been a combination of top-down and bottom-up approaches. Countries must have good growth prospects and on a bottom-up perspective companies must be producing a strong cash flow, must be able to give a cash return to shareholders, and have increasing margins.
The City of London Emerging World fund also performed well over a three-year period and was ranked eight.
However, the investment strategy used for this portfolio focuses on a value-oriented approach and looks at funds that are specifically trading at a discount to their net asset values.
Alpha is generated in the fund by capitalising on discount changes and pricing anomalies that arise in closed-ended funds.
This is achieved first, by purchasing funds when they trade at historically wide discounts to net asset value and by selling them when the discount to net asset value has narrowed towards or beyond their historical average.
Second, it is achieved by taking positions in funds benefiting either from automatic open ending, liquidation or corporate actions, each of which effectively serves to reduce or remove the discount and generates out performance.
Mark Dwyer, director of City of London Investment Management, says: 'Buying discounted funds offers both upside potential, as a return multiplier in rising markets, and downside protection, buffering against losses in down markets.'
The portfolio returned its best performance between April 2000 and March 2001.
According to Dwyer, the best discount changes were found on the New York stock exchange in 2000.
He sold funds based in the local emerging markets such as Taiwan, Hong Kong, China and bought funds listed on the New York stock exchange. These funds included the Korea Funding, India Funding and India Growth fund and were trading at a wide discount to net asset value.
Michael Russell, group economist of City of London Investment Management, says the good performance can be attributed to the top-down process as well as the bottom-up.
Russell says: 'Korea has performed well as it has had a buoyant recovery in the financial markets. The government reform package has spurred growth in the private sector, the housing market and increased credit card spending. Interest rates have been held at low levels.'
The fund dropped slightly in 2001 to the 19th percentile. However, in 2002 went up to 15th percentile.
In this year the outperformance was obtained in a Singapore-listed fund, Thai Prime, that invests in Thai equities and converted from being a closed-ended fund to an open-ended.
The Soc Gen Central and Eastern Europe fund also outperformed by converting from closed-ended to open-ended status.
From a top-down perspective, Thailand has had a buoyant recovery following the financial crisis. The authority has lowered interest rates to encourage private sector expansion.
Thailand has progressed in terms of privatisation, dependence on foreign capital has been reduced, the banks are more willing to lend money and there has been consolidation in the financial sector.
In Eastern Europe, positions have benefited from convergence of the area. Hungary, Poland and the Czech Republic will enter the EU in 2004. In these countries interest rates and inflation have fallen.
Funds that have not performed so well over a three-year period include the Dresdner DIT Global Emerging Market Equity and the Dresdner GD Emerging Markets.
The DIT Global Emerging Market Equity was ranked last ' 110 out of 110 ' over a three-year period and the Dresdner GD Emerging Markets was ranked 108.
Michael Konstantinov, head of emerging markets equity at Dresdner, says both are retail funds, but have different investor clientele. The DIT is more focused towards the German investor and the GD is focused towards the UK retail market.
Konstantinov says the poor performance of both funds can be explained partly by the large outflows of money from the portfolios.
The Dresdner GD Emerging Markets Equity was in the 100th percentile in between April 2000 and March 2001.
According to Konstantinov, the GD fund had large outflows in 2000 after the collapse in the technology sector. Investors felt it was too risky to invest in.
Konstantinov says the portfolio was heavily weighted towards the TMT sector and although he started to reduce weightings it was not sufficient for when the bubble burst.
The DIT Global Emerging Markets Equity fund was in the 91st percentile during this period. Konstantinov attributes this fund performing better because of outflows were greater in the UK retail portfolio than the German.
In 2001, the GD repositioned its portfolios to a defensive position. The portfolio had reduced exposure to TMT sectors. However, exposure was increased in Mexico, Central Europe and Russia. In between April 2001 and March 2002 the portfolio increased dramatically and improved to the 21st percentile.
However, for the DIT, fund performance worsened. It was ranked in the 100th percentile.
Konstantinov says: 'The fund was positioned similar to the GD, however, following 11 September 2001 it had a dramatic number of outflows. This was not the case for the GD fund.'
In 2002, the two portfolios performed similarly. The DIT Global Emerging Market Equity fund was in the 63rd percentile and the Dresdner GD Emerging Market fund was in the 62nd percentile.
Throughout most of 2002 both portfolios had a defensive position. For example, the portfolio had weightings in such sectors as gold and platinum in South Africa and Russia.
In 2003 the portfolios began to increase exposure to Brazil due to expectations that the new party in power did not pursue left-orientated policies and due to the continuing economic reform process.
The forces at play in investment - most obviously, regulatory change, uncertain markets and shifting demographics - are as strong today as they were when Professional Adviser launched its sister magazine Multi-Asset Review in 2017.
Regulator has visited some firms already
Platforms react to Fidelity blocking Income Focus purchases
Chris Hill's letter to Treasury
Cash balance surges