Revival in emerging markets
THE launch of a new emerging markets fund by star manager Terry Smith has focused attention on a region that has lost favour with many investors after years of poor returns.
Smith is known for his maverick approach to investing. He doesn’t put his money in many companies, and when he does he keeps it there for years.
His highly rated Fundsmith Equity fund has turned £1,000 into £1,480 in three years. Now he is scanning the emerging markets, including countries such as China, Brazil, India and South Africa.
His new fund – Fundsmith Emerging Equities Trust (Feet) – is an investment trust. These are largely the same as unit trusts (funds) but they don’t have an infinite amount of units for investors to purchase. Instead you buy shares in the same way you would with a company.
When a trust is out of favour the price of the shares will fall to less than their value, known as trading on a discount. When it is popular, investors will pay more for the shares than they are worth, known as trading on a premium.
Smith’s trust, which attracted £ 193m of i nvestors’ money at launch, has gone straight to a hefty 8pc premium, with investors paying £1.08 for assets worth £1.
But the appetite for emerging markets has not been strong this year. They had a particularly turbulent time in the first three months, when markets fell by around 10pc.
Fears about the impact of the US winding down its quantitative easing stimulus prompted many investors to pull their cash out of emerg- ing markets, with some countries reliant on the US for investment.
But Julie Dickson, head of equities at investment firm Ashmore, believes investors are starting to realise they over-reacted and are coming back to the market.
In the past 12 months Asia funds have typically lost £34m a month as investors pulled their money out. But last month £54m was ploughed back in to the region, with China being particularly popular.
Dickson says: ‘There are some really compelling opportunities in the country. It has a growing middle class, increasing wealth and a robust economy – it has undergone a complete transformation.’
China’s big success story has been in its consumer industry. The rise of the luxury goods shopper, coupled with an increase in online shopping, has heralded a new era for an economy that has traditionally relied on manufacturing.
Dickson also sees opportunities in nearby Korea and Taiwan.
Russia may be worth a bet as negative sentiment towards the country means share prices are incredibly cheap. ‘But you need to do your homework,’ she warns.
Leon Eidelman, manager of the JPMorgan Emerging Markets fund, likes India, which has had a good run since the market hit a low last summer. He favours consumer brands and financial firms, and tries to avoid commodity businesses.
Emerging markets have histori- cally been viewed as a risky bet. Corruption and a lack of transparency in companies have been a real problem, but in many regions this is starting to change. Pressure from overseas investors means firms must now adopt better practices or miss out on vital funding.
But there are still areas to be cautious about. Dickson is wary of overpriced shares in South Africa, while Eidelman has been selling shares in Latin America.
Investors should still prepare themselves for a bumpy ride and look to invest for at least five years to allow for the ups and downs in performance to average out.
One of the top-performing global emerging markets funds over the past year is Lazard Emerging Markets, which has grown 6.3pc.
The largest proportion of the fund is invested in Asian companies, with some Latin American and European shares also in the mix. And just because these economies are developing doesn’t mean you won’t have heard of any of the businesses the fund invests in, which include Samsung, Hyundai and Russian bank Sberbank.
Eidelman says: ‘Optimism has returned to many emerging markets. There is a belief that a healing economy will eventually help emerging market growth and produce the long-awaited upturn in earnings.’