Emerging markets have fascinated investors for decades – and for good reason. These underappreciated areas have the potential to deliver bumper returns.
However, they can also be risky. There are political risks to consider (these countries may have unstable or even volatile governments and political unrest is a possibility), economic risks due to things like unregulated markets and poor governance, and currency risk (many emerging market currencies can be volatile compared with the US dollar, for example).
Therefore, if you fancy having some exposure, it makes sense to pick an investment fund run by a manager who has built up many years of experience.
Here, we take a look at the portfolios of four leading emerging market fund managers to reveal exactly how they have invested their assets.
Strategy: This Chelsea Core Selection fund invests in growing companies with strong sustainable cash flows at attractive valuations. These companies will be mainly in emerging markets, but up to 20% of the fund can also be invested in frontier markets. Companies listed or headquartered in other locations but with substantial connections to these areas will also be considered.
Geographic allocation: The largest overweights in this fund relative to its benchmark are to Zambia, Chile, and Argentina*. Its biggest relative underweights are currently to Taiwan (also 10% less than the benchmark), South Korea and India*.
Prominent stocks: Top ten positions include 5.2% in Sociedad Quimica y Minera, the Chilean chemical company and world’s biggest lithium producer, a 3.2% holding in Pinduoduo, the largest agriculture-focused technology platform in China and 3% in car manufacturer Kia*.
Notes: Manager John Malloy approaches his portfolio from two angles. One is to analyse the economic and political backdrop using his own insights alongside a series of expert consultants. This will score countries on their attractiveness. The other approach is individual company analysis, where he looks for companies trading on reasonable valuations but tapped into key long-term themes or trends.
Strategy: On the Chelsea Selection, this fund focuses on rapidly growing sectors in countries with political and economic backdrops conducive to income growth and consumer confidence. “We search for companies with market dominance, preferring local leaders, with cashflow returns adequate to support growth, and with reasonable valuations,” the managers stated.
Geographic allocation: India accounts for the largest share of assets with 36.2%, closely followed by China with 34.3%*. The third biggest allocation is 5.3% in Poland*.
Prominent stocks: Varun Beverages, an Indian company that produces, bottles and distributes drinks, is the largest holding with a 5.5% position*.
Notes: A strategy overview published by Aubrey claimed growth in consumption in emerging markets provides the best long-term structural opportunity. “The aspirations of the five billion or so potential consumers in the emerging world are much the same as those in the developing world: better food, housing, transport, healthcare, education and entertainment,” it stated.
Strategy: This fund invests in small and medium-sized companies that are high quality, efficient and sustainable businesses benefiting from long-term trends. This search takes place in countries supportive of business growth.
Geographic allocation: Taiwan currently has the biggest country allocation of 19.4%, followed by 19.1% in India, and 14.9% in Korea**.
Prominent stocks: SINBON Electronics, which has operations in Taiwan, China, Japan, the UK, Germany, Hungary, and the UK, has the largest stock allocation of 3.69% of the fund**.
Notes: Kunjal Gala, the fund’s lead manager, recently commented on the potential benefits of having exposure to Peru. “We are invested in Peru because we believe that the Peruvian economy is ultimately driven by the price of copper, and we believe that this is likely to be to Peru’s advantage over the next decade,” he wrote. “Copper prices will remain moderately high for the coming five to 10 years.”
Strategy: This fund invests at least 70% in shares of large and mid-sized companies based in emerging markets, including those listed on exchanges in developed markets.
Geographic allocation: India has the largest country allocation of 27.5%, very closely followed by 27.3% in China**. Mexico comes a distant third with a 10.3% share**.
Prominent stocks: ICICI Bank, the Indian multinational bank, tops the list of 10 largest holdings with a 6.2% share of assets under management**.
Notes: In a recent note, manager Rasmus Nemmoe highlighted some of the key factors he considers when constructing his portfolio. “Our search for quality starts with people — assessing their track record of how they executed strategies as well as how they are incentivised,” he wrote. “We look for people who are risk-aware and humble, like Sandeep Bakhshi, CEO of ICICI Bank.”
*Source: fund factsheet, 31 May 2022
**Source: fund factsheet, 30 April 2022
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.