Emerging markets have been undergoing a sharp correction since the beginning of the year, and they might remain volatile in the short-term. On the other side, the fiscal and monetary policies addressing the pandemic have been crucial in building a global economic recovery that also benefited emerging markets.
With this is mind, we wanted to understand what funds were more interesting to invest in the category of Global Emerging Markets allocation, as the combination of Equities and fixed income could be helpful to navigate the current circumstances of the market.
We have selected 5 funds based on the data provided by Morningstar on the category of Global Emerging Markets allocation.
Data: Morningstar 16/12/2021
Global Emerging Markets Balance Portfolio, DWS Investments
Francois Fabreges, Co-Portfolio Manager of the Global Emerging Markets Balance Portfolio
Current situation of the emerging markets
The unprecedented fiscal and monetary policies addressing the pandemic have been crucial in building a global economic recovery that also benefited emerging markets. Surging commodity and energy prices created opportunities for countries such as Russia.
Nevertheless, the quick recovery came at a cost for others. Higher food and energy prices put pressure on local demand in other countries such as China or Brazil where growth decelerated.Emerging markets assets will likely face major challenges in 2022: heightened inflation, market tensions around the US rates policy lift-off and rising fiscal burdens. Lately, global investors have been cautious on the asset class.However, we believe that opportunities may arise for emerging markets ultimately. Firstly, valuations are still very attractive on a historical basis both in equities and higher yielding bonds. Moreover, although China growth may slow down, the country is still likely to contribute ca. 25% of global growth in the next five years according to the IMF forecasts.
Strategy and portfolio
The Global Emerging Markets Balance Portfolio is a multi-asset fund denominated in euros that invests across emerging market asset classes. Its investment objective aims to achieve superior risk-adjusted returns within a balanced risk profile. The strategy is based on an 50% equity, 40% fixed income and 10% cash anchor, it invests globally into EM equities (min 20%, max 70%), EM sovereign (hard and local currencies) and credit (both up to 75%), but also commodities-linked securities (max 10%) and EM currencies.
In addition, it utilizes derivatives for both investments and hedging.The fund is currently well positioned to profit from an equity recovery in Asia with an allocation of 45% to the region (main exposure to China, South Korea and India), in EMEA with 8% (half in Russia) and Latin American with under 4%. The strategy remains cyclical in terms of sectors with a tilt towards financials, likely benefiting from a combination of growth and rates-normalizing policies. On the fixed income side, the fund is consistently defensive with a low duration profile in view of inflation and a US rates policy lift-off risk. We remain cautious on emerging markets local bonds and currencies and prefer to invest in bonds denominated in EUR or USD due to their robustness.
AB – Emerging Markets Multi-Asset Portfolio
Morgan Harting, Portfolio Manager AB Emerging Markets Multi Asset Portfolio (EMMA)
Within our AB Emerging Markets Multi Asset Portfolio (EMMA) we have flexibility of allocation across a wide range of asset classes, regions and countries. Taking a multi-asset approach in emerging markets (EM) dramatically increases our investment opportunities compared to single-asset approaches.
In both the EM equity and bond universe, we have access to 100 different countries, all with different local growth dynamics and idiosyncrasies. This offers us a wealth of opportunities not only to enhance portfolio returns, but also to manage risk through diversification.
With this in mind, we tend to allocate our equity exposure to North Asian markets – and this remains the case today – and the portfolio has a bias towards areas that will benefit as global economic activity and earnings growth accelerate. In terms of countries, this translates to places like South Korea and Taiwan, which have seen a strong rebound in exports and mobility as their economies have reopened.
We believe companies such as Samsung Electronics and Taiwan Semiconductor Manufacturing, will benefit from these “reopening” tailwinds but also from longer-term changes with the adoption of 5G. Apart from North Asia, we maintain our biases towards equity opportunities in Russia and India, as we expect rising commodity prices, caused by strengthening global demand and supply constraints, to be a driver for these countries’ metals and oil & gas sectors. LUKOIL and Hindalco Industries are two of our most important positions.
Generally speaking, we are inclined to allocate to fixed income assets in markets such as Latin America and the Middle East – which is where we are finding the best future risk-adjusted returns. At the moment, among our strongest conviction areas are Argentina and Peru – which are both places where we believe prices do not match fundamentals.
These countries, along with others we hold in the fixed income arena, are examples of exposures that would probably not be found within an equity-only approach; but we believe they contribute to achieving a good balance in EMMA – creating a truly global and unconstrained way of investing in EM.
Looking ahead to the final weeks of this year, we continue to take a favourable view of EM assets that are underpinned by strong fundamentals, attractive relative prices and positive technical dynamics. We expect to see good returns for the remainder of 2021 and 2022, but, as we have seen time and time again, it can be a bumpy ride, which is why a managed risk solution for EM, such as EMMA, can be very effective.
Carmignac Portfolio Emerging Patrimoine
Xavier Hovasse and Joseph Mouawad Portfolio Managers
Main areas or positions if possible, latest changes . The 2020 crisis was an ‘excellent test’ to prove the power of fund management discipline and revealed what flexibility really means when it comes to managing risks. On the contrary, Emerging markets have been undergoing a sharp correction since the beginning of the year, and we think they might remain volatile in the short-term, calling for selective positioning.
We took advantage of the markets’ recent dip to increase our exposure to the equities and emerging market currencies that look well placed to benefit from these conditions, and are valued attractively. The Fund currently has a bias towards Asia and particularly China. The structural transformation of its economy and the long-term ambitious reform plan of the government offers attractive long-term investment opportunities. Concerning EM debt, the context seems also favorable. Indeed, we are indeed witnessing the lower real interest environment in many decades. EM assets haven’t yet benefited from that environment for 2 reasons.
First the Chinese regulatory and credit tightening which weighed on equities and credit. Secondly, the monetary tightening of most EM central banks to the inflationary environment. Both of these headwinds are now mostly behind us today. So looking forward we believe EM assets, and EM debt assets are likely to benefit from the real interest rates differential in favor of EM. In addition, emerging markets tend to benefit from an inflationary environment as they include commodity-rich and manufacturing-supplying countries, which act as a bulwark against inflation.
Philosophy and investment strategy
The Carmignac Portfolio Emerging Patrimoine fund is aiming to capture emerging markets growth while limiting the impact of falling markets, making it a unique socially responsible solution for investors seeking diversified and conservative emerging market exposure. The Fund combines three performance drivers (stocks, bonds and currencies) and is “non-benchmarked”, allowing managers to invest freely in emerging markets via a flexible and active management in order to take advantage of the decorrelation between the different assets, regions and sectors. We consider this flexibility and diversification to be great strengths and key contributors to the Fund’s long-term success. Another unique features of this fund is that it has a solid SRI process for all asset classes, which favors the selection of countries and companies providing solutions to environmental and social challenges.
Capital Group Emerging Markets Total Opportunities
Richard Carlyle, Chief Investment Officer, Capital Group
Capital Group Emerging Markets Total Opportunities (LUX) is a multi-asset fund offering exposure to emerging market companies, countries and themes. The fund seeks to offer investors the opportunity to gain exposure to the long-term growth of emerging markets, but does so with less volatility than investing in a pure emerging equity portfolio. It achieves this by investing in both eligible equities and bonds.
Combining equities and bonds means that, in a volatile environment, it should experience less volatility than its pure equity counterparts. However, our active bottom-up approach to the selection of both equity and fixed income securities in global emerging markets means that we also seek to offer investors the opportunity to benefit from the long-term growth of emerging markets, while avoiding any geographic bias inherent in the emerging markets equity index.
As pioneers of emerging markets investing, Capital Group Emerging Markets Total Opportunities (with EUR 957 million in assets under management) represents the culmination of our 35+ years of experience in managing emerging markets equities and debt through various economic cycles. The managers of this strategy have an average of 27 years of industry experience, giving clients access to a knowledge base built up over multiple market cycles. This experience, combined with our integrated on-the-ground analysis, helps to bring together promising investment ideas from around the world from which our clients can benefit.
The year 2021 has continued to see volatility in global financial markets and emerging markets have not been immune. Overall, the outlook has improved with signs of global economic recovery. At a more secular level, in particular, demand for semiconductors has been strong and commodity prices have risen. Although it should be noted that this, in combination with other supply shortages and accommodative monetary policy, is contributing to inflation concerns. The fund is guided by individual stock selection rather than any top-down themes, and currently finds interesting opportunities in sovereign bonds, financials, information technology and healthcare, among others. Regionally, the largest weight of the portfolio is in China, Mexico and Russia. It should be noted that our exposure to China has not been through many of the large-cap internet stocks, but through other opportunities we have found in sectors such as healthcare and financials.
Since inception, the fund has fallen less than the MSCI EM IMI index in 79% of down markets, allowing investors to stay invested during sustained periods of high volatility. In an environment of ultra-low returns, the fund has delivered an average net return of 4.3% since inception, compared to 2.5% for the MSCI EM IMI index. Over the last 12 months, the fund has returned 16.6%, compared to 20.8% for the MSCI EM IMI index and 12.5% for the blended universe.