Where are Emerging Market Fund Managers Investing?

In emerging markets, active fund managers are favouring consumer staples stocks but are underweight energy, materials and technology companies 

Simon Dorricott 25 July, 2017 | 11:37AM
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A switch in leadership style in 2016 saw the value style come to the fore, but looking at 2017, Morningstar’s Global Emerging Markets peer group shows some clear biases relative to the MSCI EM Index. 

At the country level the least favoured area is China, where in addition to the concerns over the rate of the slowdown in economic growth, a number of managers also have concerns over corporate governance, especially within some of the state-owned enterprises (SOEs). South Korea, Taiwan and Malaysia are the other main underweights. 

The most positively viewed country is India, which remains favoured due to its growth outlook. Managers hold different parts of the market depending on their views on valuation, but India is widely regarded as offering the best medium-term economic growth prospects among emerging markets.

Managers Shun Energy and IT

At the sector level, active managers prefer consumer sectors, particularly consumer staples, again reflecting a quality growth bias and the over-arching theme of emerging market investment – namely increasing domestic living standards and therefore consumption.  

Underweights are less pronounced, but include energy, materials and IT, the latter including some large index constituents that divide opinion.

The JP Morgan Emerging Markets Equity Fund holds a Morningstar Analyst Rating of Bronze and has been formally managed by Leon Eidelman since July 2016. 

Eidelman takes a long-term approach and focuses on quality growth firms. The quality bias is reflected in the fund’s return on equity, which is higher than its Morningstar Category average and the MSCI Emerging Markets Index. 

The fund also has had a pronounced bias towards sectors positively affected by domestic demand and consumption, rather than areas influenced by commodity prices and currency moves. The approach may result in the fund underperforming for short periods if markets are driven by commodities, lower-quality names, or macro and political issues, but it has generally not shown significant weakness versus the category over more meaningful periods. 

Fidelity Emerging Markets holds a Morningstar Analyst Rating of Bronze and remains a strong option for investors, despite the relative weakness seen in 2016. Manager Nick Price has been at the helm of this fund since 2009 with impressive resources at his disposal. 

The investment process is predominantly bottom-up, with the team focusing on quality growth companies that exhibit: superior and sustainable return on assets; strong, unleveraged balance sheets; shareholder-friendly management; and reasonable valuations over a full economic cycle. There is a long-standing overweighting in South Africa/sub-Saharan Africa, where Price sees structural growth opportunities. 

The portfolio shows clear biases to growth factors, higher valuation, and a higher return on equity than both the MSCI Emerging Markets Index and the global emerging markets equity Morningstar category average.

A version of this article appeared in PWM magazine

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Simon Dorricott  is a Senior Fund Analyst for Morningstar

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