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Emerging markets and commodity funds were among the top five best performing last year, data from Morningstar Direct showed. 2016 was a turnaround year for both sectors – in they were the worst performing funds and sectors. What caused the change in fortune? The rally in commodity prices was a significant tailwind, as was the greater economic and political stability in China.
The Bronze Rated JP Morgan Natural Resources fund and the Gold Rated BlackRock Gold and General fund took first and second place among the best performing top-rated funds in 2016, gaining 80.8% and 78.7%. In third place was the Neptune Russia & Greater Russia fund, which gained 71.3% and is Bronze Rated.
The Silver Rated First State Global Resources fund came in fourth among the top rated funds with 69.9% gains, and the Bronze Rated Aberdeen Latin America Equity fund came fifth with 62.9% gains.
Investors Fail to Back the Right Funds
Historical fund flow data often suggests investors are slow to spot turnaround funds – investing only after a period of outperformance. This can be said for investors’ appetite for emerging market funds in 2016 – while the sector recorded inflows, it was less than 10% of the money that have left the sector the previous year. Data from Morningstar Direct shows that global emerging markets funds recorded £81 million inflows last year, in 2015 the sector saw £1 billion outflows.
Investor confidence in emerging markets grew towards the second half of the year 2016. In July and October, the sector saw £190 million and £175 million respectively, the largest inflows since November 2014.
Investors were slow to ride the precious metal rally too – as the sector saw low inflows of £154 million from January to November 2016. Sector equity natural resources recorded slight outflows of £1 million over the same period.
Investors shunned outperformer Russia as the sector recorded £5 million outflows from January to November 2016 while Latin America Equity saw £6 million inflows over the same period of time.
What Do the Analysts Say?
The 2016 best performing fund Bronze Rated JP Morgan Natural Resources is a compelling offering within the resources space for investors who understand its risks and distinct features, says Morningstar fund analyst Fatima Khizou.
The fund manager Neil Gregson has run this fund since February 2012. Khizou said Gregson is a capable manager who shares the fund’s long-held philosophy and is able to add value over the long term.
Over most of Gregson’s tenure, a weak period for resources stocks, the fund has lost more than its comparative Euromoney Global Mining & Energy Index and the sector equity natural resources Morningstar Category, mainly because of its structural small and mid-cap bias.
However, the fund’s longer-term track record using the same approach is solid, and such a loss is of little surprise during a down period, Khizou added.
The fund is also relatively cheap, with an ongoing charge of 1.68% which is below the category median. Fund flows data from Morningstar Direct showed that in the month of November 2016, the fund saw £25 million inflows.
BlackRock Gold and General is Gold Rated by Morningstar analysts. Khizou believes this fund remains a strong offering for investors seeking mainstream gold and precious-metals equity exposure in a risk-controlled manner.
Evy Hambro has been fund manager since April 2009. Hambro brings a wealth of experience to this fund and has proved over time that he is a talented portfolio manager who is supported by a well-resourced team with significant expertise and a co-manager, Tom Holl.
The investment process remained unchanged under the new comanager structure. The long-term record indicates Hambro has been successful in adding value by applying the outcome of the team’s detailed commodity and company analysis in a risk- and liquidity-aware manner.
The fund is also not overly expensive; its 1.92% ongoing charge is in line with the category median. The fund saw £8 million inflows the month of November 2016.
Russia and Latin America
The third best performing fund in 2016, Bronze Rated Neptune Russia & Greater Russia continues to benefit from a seasoned manager and his pragmatic approach, said Morningstar fund analyst Lena Tsymbaluk.
This fund benefits from a veteran investor with 30 years’ experience in Russian equities, Robin Geffen, said Tsymbaluk.
Geffen has historically preferred Russia’s domestically oriented sectors, rather than energy. The significant underexposure to energy was a costly decision in 2011, while the domestically oriented positioning contributed positively in 2013. Nonetheless, Geffen’s long-term track record remains strong, said Tsymbaluk.
Over the past 10 years, the fund has returned an average of 2.26%, ahead of both the benchmark and the index. Some years have seen significant gains; 116% in 2009 and 34% in 2010, but other years have recorded significant losses such as 28% in 2011 and 47% in 2014.
The fund’s ongoing charge of 2% is lower than its category median of 2.27%. In November 2016, the fund saw £1 million inflows the month alone.
The Silver Rated First State Global Resources fund remains a high-quality way to invest in resources-related equities, said Khizou. The fund manager Joanne Warner has been lead manager since 2006.
The long-term track record remains solid and is significantly ahead of the Sector Equity Natural Resources Morningstar Category average, said Khizou. The manager seeks to identify attractive long-term investment opportunities through detailed company research. The fund’s 1.67% ongoing charge is well below the category median. In November 2016, the fund saw £11 million inflows the month alone.
The fifth best performing of the year Bronze Rated Aberdeen Latin America Equity continues to benefit from the consistent and sensible approach undertaken by a stable and experienced team which has resulted in a strong long-term track record, said Tsymbaluk.
Tsymbaluk said one of this fund’s strengths lies in the team approach and the depth of the analytical resource of Aberdeen’s 18-strong global emerging-markets team, which is headed by seasoned investor Devan Kaloo. The team invests for the long term and pays little attention to the benchmark when constructing the portfolio. The fund’s ongoing charge, at 2.03%, is in line with the Morningstar Category median of 2.11%. In November 2016, the fund saw £4 million outflows.
