Growth is the main reason that investors turn to emerging markets; the idea is that these earlier stage economies should grow at a faster pace than those in the developed world. Indeed, emerging markets are forecast to grow two-and-a-half times faster than developed markets in 2020, according to the International Monetary Fund.
What does that mean for investors? Well, the share prices of companies operating in these markets should reflect this growth, boosting the funds that invest in them.
The case for active fund investing in this space is stronger than for developed markets. But with so many funds to choose from, many with different strategies and focuses, it can be hard to whittle down the options. We asked Morningstar analysts which emerging markets funds they rate:
Comgest Growth Emerging Markets
Nearly 30% of Comgest Growth Emerging Markets is invested in China, a touch lower than its benchmark, the MSCI Emerging Market Index. China’s Ping An Insurance (601318) is the biggest holding in the fund, which has a Gold Morningstar Analyst Rating, making up just under 7% of the portfolio. It's a popular option for many managers in the region – the company has a 40% share of its market is a leader in ESG, according to the fund’s manager David Raper. He thinks the stock is a good way to take advantage of the ageing and increasingly wealthy population in the country.
Brazil is the next country exposure in the fund - highlighting the breadth of the markets these funds cover. Almost 14% of assets are invested in the Brazilian stocks, almost double that of the index. Raper says the country is engaged in “the biggest economic overhaul for two decades” and expects strong profit recovery among domestic companies after years of cost-cutting.
Why will emerging markets perform well in 2020? Raper is optimistic that reforms and economic stimulus by China and India in recent years have yet to bear fruit. Emerging stock markets are also showing signs of “decoupling”, they argue, which means that moves in these markets don’t necessarily track developed world stock markets. This can be useful for investors looking for diversification.
Morningstar analyst Mathieu Caquineau rates the Comgest team and its strong long-term track record - although the fund is slightly behind its category average with annualised returns of 6.67% over five years. Caquineau adds: “The team invests with conviction for the long haul and sticks to its guns when its style is out of favour.”
JPM Emerging markets smashed its benchmark in 2019 with a gain of 27.9% - the MSCI EM index rose by 13.9%.
The £2 billion fund was upgraded by Morningstar analysts from Bronze to Silver in May 2019. Morningstar analyst Andrew Daniels says the fund is a strong option for global emerging markets exposure as it has many appealing traits, including below-average fees, with an ongoing charge of 0.9%.
Leon Eidelman, manager of the fund, “comes across as a savvy investor”, says Daniels, and one who “has been able to stick to his knitting during challenging periods”.
Like the Comgest fund, JPM Emerging Markets is overweight on financials relative to the benchmark with a 37.5% allocation to the sector; five of the top stocks in the fund are financials including perennial emerging market favourites India’s HDFC (HDFC), Russia’s Sberbank (SBER), and AIA (01299), which covers a range of Asia-Pacific markets. China’s consumer internet giant Alibaba is the fund’s biggest holding.
T. Rowe Price Emerging Markets
This Bronze-rated fund also beat the benchmark last year with a gain of 22%. Like the Comgest and the JPM funds, it has been helped by a high weighting to the financial sector - more than 30% of the portfolio in this case. The fund’s other heavy weightings are towards technology and consumer staples.
Avoiding basic materials and energy names “can hurt the fund at times,” argues Morningstar analyst Mathieu Caquineau, for example having zero exposure to energy in 2018, but he praises the stock-picking skills of lead manager Gonzalo Pangaro and the fund’s significant outperformance of the index over the long-term. The fund has delivered annualised returns of 10.57% over five years, comfortably ahead of its benchmark.
The fund focuses on high-quality, well-run companies in the developing world that are not dependent on the broader economic backdrop to grow their market share. This is important with growth in China, the fund’s biggest allocation by country, flagging after the US-China trade war. The fund also invests in South Korean stocks, with two of its biggest holdings based in the country: Samsung (005930) and LG Household and Healthcare (015900).
The manager is not alone in favouring the country; it is an area Morningstar Investment Management is expecting to outperform this year. Mike Coop, head of multi-asset portfolio at MIM says: “South Korea offers a better opportunity for long-term investors than most other developed and emerging markets. It is one of the few trading below fair value."
