This article is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.
Comgest Growth Emerging Markets
This Gold-rated fund has also shown defensive qualities by better protecting investors’ capital in down markets and has provided a less-volatile ride than peers, says Morningstar analyst Mathieu Caquineau. The fund's relatively conservative portfolio is prone to lag in strong rallies, however.
Like all Comgest funds, the strategy is clearly oriented towards quality growth companies. Stocks belonging to the most-cyclical sectors, including banks, are generally excluded from the investment universe. Indeed, looking for companies with one or more sustainable competitive advantages leads the portfolio to preferred sectors such as in technology or consumer defensive stocks, though exposure to the latter has been gradually reduced in recent years for valuation reasons.
JPMorgan Emerging Markets (JMG)
Analyst Simon Dorricott thinks JPMorgan Emerging Markets is a high-quality offering and awards it a Silver Rating. The fund manager Austin Forey process is tried and tested, taking a long-term approach and focusing on businesses that exhibit the following characteristics: attractive earnings, strong balance sheets, excess returns on capital, sustainable competitive advantages, an ability to grow market share, and potential to generate significant shareholder value.
There tends to be a bias to domestic consumption growth, rather than commodity prices, and therefore the portfolio will often be dominated by financials and consumer staples. At the same time, cyclical sectors such as energy, and materials are generally underweight.
Aberdeen Emerging Markets Equity
2017 has been a test of character for Aberdeen Emerging Markets, but there’s still plenty to like here. The firm boasts a large and experienced investment team led by Devan Kaloo, a 17-year veteran of the firm. Kaloo is someone Morningstar fund analysts hold in high regard.
Aberdeen’s tried and tested investment approach is applied across all equity strategies managed by the firm. The focus is purely bottom-up, quality firms trading at attractive valuations. Quality describes multiple factors here – franchise power, earnings repeatability, management ability and governance standards, balance sheet strength, and treatment of minority shareholders.
The firm believes that understanding how managers traditionally have generated and spent free cash flow reveals much about their aptitude. Acknowledging the team has been viewed as reactive at times, the Asian team in particular has undertaken a deep dive on long-term underperformers to determine if the underlying issues are cyclical or structural in nature. There has also been more willingness to consider quality cyclical names, and this is certainly the case when it comes to how the fund’s Chinese exposure has evolved over the past years.
Lazard Emerging Markets
Lazard Emerging Markets deserves high praise for its stable team of talented staff and time-tested process, says Dorricott. James Donald ranks as one of the most impressive investors in the peer group. His insights, and those of his well-tenured colleagues, are a key advantage for the strategy.
The emerging-markets team of seven can also tap into Lazard's deep pool of analytical resources, helping them form views on different companies and industries. Donald and co undertake an extensive travel schedule, with each team member spending more than eight weeks on the road meeting with company management and a range of local experts.
The process employed is typical of Lazard's rigorous approach. The focus is on firms with improving financial productivity that haven't been widely recognised by the market. An initial screen uses a range of valuation metrics to filter the universe.
The analysts then carry out detailed research to understand the drivers of a companies' profitability. They pay particular attention to cash flow and its impact on the balance sheet, and consequently shareholder value. Top-down risks are also considered, including macroeconomic; political; and environmental, social, and governance factors.
T. Rowe Price Emerging Markets Equity
Morningstar analysts like this fund's long term-focus and proven investment strategy, and award it a Positive Process rating. Fund manager Gonzalo Pangaro looks for industry leaders with strong growth prospects. While doing so, he pays ample attention to valuations. He concentrates further up the market-cap ladder than most of his global emerging-markets peers and the MSCI Emerging Markets Index, so this fund's average market cap tends to be higher than both the norm for the peer group and the benchmark, explains Caquineau.
He is committed to issue diversification and normally moves at a measured pace. Like the other emerging-markets managers at T. Rowe Price, Pangaro goes wherever the most attractive growers are and is comfortable building oversize positions in countries and sectors that are full of compelling opportunities. This fund's country and sector weightings, therefore, often differ from those of its peers and the MSCI Emerging Markets Index. That said, Pangaro avoids extreme overweightings and underweightings.
The fund significantly underperformed in 2008 due to its hefty stakes in some of the hardest-hit countries during the global financial crisis. Pangaro is sensitive to macro risks, and will move to an underweight position if a country's economic outlook is deteriorating. This is important, as currency volatility is also a significant risk in emerging markets. Pangaro works with the firm's emerging-markets fixed-income team on top-down views.
