FE’s Joshua Ausden scours the marketplace for the best hidden gem funds for your portfolios.
Emerging market fund pickers across the UK and beyond are looking to fill the void left by Aberdeen and First State, which have been forced to close their flagship products to new money in recent years.
One fund that has caught the eye as a result is Hermes Global Emerging Markets, run by the highly-rated Gary Greenberg (pictured). The manager has navigated the portfolio well through a difficult time for emerging markets since taking over in July 2011.
FE Trustnet data shows the fund has made a positive return of 10.8% over the period, even though its MSCI Emerging Markets benchmark and the IA sector average are down more than 7%. Only three emerging market funds have returned more, including two that have a dedicated small-cap focus.
As well as excelling from a return point of view, Hermes Global Emerging Markets has performed with around the same volatility as the index, and has protected investors more effectively during down periods.
The team believes buying at below companies’ intrinsic value provides a margin of safety in a volatile asset class, which is further boosted by the integration of ESG (environmental, social and corporate governance) analysis.
While bottom-up analysis is important, events like the 1997 Asian crisis prove that macro does matter in emerging markets. A quarterly quantitative and qualitative macroeconomic, social, political and financial analysis allows Hermes to identify emerging trends and the relative attractiveness of countries and sectors.
China is currently the fund’s largest country position at 29%, representing a 4% overweight.
However, Greenberg has recently reduced his exposure to China due to worries over valuations, which proved to be well timed in light of the recent correction in mainland and Hong Kong-listed Chinese companies.
In spite of the overweight position, Hermes Global Emerging Markets has actually outperformed its sector and index in recent months.
Greenberg has avoided the more painful areas such as biotech and healthcare, where valuations were inflated, preferring ‘unfashionable’ sub-sectors such as air conditioning, beverages and railways, and innovative Chinese companies listed in the US and Hong Kong, where valuations are at wide discounts.
India is the fund’s biggest overweight, accounting for around 15% of assets overall. Like many, Greenberg saw the appointment of pro-business prime minister Narendra Modi as a big plus for the region, and one which will help once frustrated companies become world-leading businesses. The strong performance of India helped the fund deliver top quartile returns in 2014.
Generous dividend yields have also attracted him to Taiwanese companies, which currently have a 13% weighting.
These overweight positions come at the expense of South America, which has very little exposure in the portfolio. Greenberg has a positive outlook for Mexico, but the lack of valuation opportunities means he currently has no exposure.
More generally, Greenberg has a positive outlook for emerging markets. While they have underperformed their developed market counterparts over the past four years, he says it is encouraging that they have shown resilience against the headwinds of a stronger US dollar, weaker oil price and fragile global growth.
He is encouraged that the emerging markets in which he invests are less leveraged to the oil price than in previous cycles, and does not expect the US dollar to strengthen as materially from here.
He also believes worries over rising US interest rates are overhyped, given that markets have been adjusting to this prospect since mid-2013.