Asian emerging market equity funds have set a stellar pace among categories, as we reach the end of the second quarter. Six out of the top 10 best-performing funds over the year to date are exposed to this region, according to data from Morningstar Direct.
The Baillie Gifford Greater China fund is the best performing fund with 27.6% gains year to date, according to Morningstar Direct. It is followed by Baillie Gifford Pacific with a 24.9% gain. The global large-cap fund Smith & Williamson Aubrey Global Conviction was the third best-performing fund with a 24.4% gain.
Other Asian equities funds on the top 10 most performing list were: JP Morgan Asia, Schroder Asian Alpha Plus – which is Silver Rated by Morningstar analysts, the Silver Rated Investec Asia ex Japan fund and Old Mutual Asia Pacific. They have all delivered returns of more than 20% so far this year. Baillie Gifford Emerging Markets Leading Companies also gained 23% year to date.
European small-cap funds also featured strongly among the top performers. Henderson European Smaller Companies and Schroder European Small Companies had 24.3% and 22.2% gains respectively.
Energy and natural resources funds are among the worst performing funds year to date, according to Morningstar Direct.
Asia Tech Firms Boost Fund Performance
Asian emerging market equities funds’ standout performance is supported by their portfolios’ investment in the technology sector. Chinese tech giants Tencent Holdings (00700) and Alibaba Group (BABA) are some of the biggest holdings in these funds, as well as the Korean tech company Samsung Electronics (SMSN).
Shares of Tencent soared 47.5% year to date and Alibaba was up 60.4% year to date; Samsung Electronics has posted a 30% rise this year. Tencent and Alibaba are rated as three-star fair valued stocks by Morningstar analysts, meaning analysts believe these two stocks are trading at their fair value estimate.
The global large-cap fund Smith & Williamson Aubrey Global Conviction benefited from the gains of Tencent as well because the Chinese tech company is the second top holding in the fund with 4.2% weighting.
Heinz Ruettimann, a strategy research analyst, emerging markets, with Julius Baer said: “The IT sector in Asian Emerging Markets, in particular, is developing very positively and is a key contributor to the overall performance. We feel confident with our positioning as three out of our six Asian countries with an Overweight rating have material exposure to the IT sector.”
Heavy Tech Exposure in Funds
Morningstar data shows that the Baillie Gifford Greater China fund has half of its portfolio in technology equities. Tencent Holdings is the top holding in its portfolio, accounting for a 9.2% weighting of the fund. Alibaba has 8% weighting in the portfolio.
The fund’s objective is to produce attractive capital growth over the long term by investing in the shares of companies listed on the stock exchanges of mainland China, Hong Kong or Taiwan. In additionit will invest in the shares of companies listed on other exchanges which derive the majority of their revenues or profits from mainland China, Hong Kong or Taiwan.
The fund has 22.2% three-year annualised returns and 17.3% five years annualised returns.
JP Morgan Asia, Schroder Asian Alpha Plus, Investec Asia ex Japan and Old Mutual Asia Pacific all have 30% of their portfolios invested in tech equities.
Lena Tsymbaluk, a fund analyst with Morningstar said overweighting in technology in Investec Asia ex Japan has had a positive effect on returns. She added that manager of the Schroder Asian Alpha Plus fund Matthew Dobbs is a skilled and experienced investor, who has been running money since 1985.
“The fund’s inception was in 2007, but Dobbs has been running the closed-end Schroder Asia Pacific since 1995 using a very similar approach. He is supported by Schroders’ team of analysts based around the world and works closely with other senior Schroders portfolio managers based in London. The analysts focus on company strategy and assess competitive position and growth prospects; they rank stocks from 1 (strong buy) to 4 (strong sell), providing Dobbs with a base from which to work. The fund’s long-term track record is strong,” said Tsymbaluk.
The other two top performing funds year to date – Henderson European Smaller Companies and Schroder European Small Companies – each have 20% of their portfolios in tech equities.
Asian Equity Funds Remain Unloved, Despite Outperformance
Despite gains in Asian equities funds, the sector still saw outflows for most of the year, according to data from Morningstar Direct. The Morningstar Asia Pacific (ex Japan) Category saw £378 million outflows in the first five months of the year.
Jan Dehn, head of research at the Ashmore Group said: “We believe that the flows back to emerging markets are in their early stage,s and that they will progress at moderate speed. In particular, we dismiss the flow picture painted by the usual published weekly flow indicators. These indicators tend to cover only publicly traded funds and therefore miss the bulk of the market, which is owned by big institutional asset owners, including large insurance and pension mandates with segregated accounts, sovereign wealth funds, central banks and others.”
Emerging Asia’s valuations are still attractive, with the regions’ price-to-book ratio standing at 1.5x, the equity risk premium trades at its 10-year average and 12-month consensus earnings growth is at 23%, said Julius Baer’s Ruettimann.
Emerging and developing economies now account for almost 60% of global GDP, up from under half only a decade ago, according to International Monetary Fund. They have contributed more than 80% of global growth since the 2008 financial crisis.
