We received the June report with the favorite funds for European financial advisor and fund selectors according to Sharing Alpha. On this occasion, we have selected the best emerging market funds, both in equities and in fixed income, based on the different categories selected by the data provider.
Best emerging market funds
In the table you can see the three emerging market funds chosen according to Sharing Alpha, including their name, category, ISIN, three-year yield and sharpe ratio. Below, we analyze each of them and the outlook for emerging markets with the asset management teams of the corresponding firms.
|ISIN||Fund||Category||3 year performance||Sharpe ratio|
|LU0390137205||Templeton Frontier Markets Fund||Emerging market equities||-8.99%*||-0.39*|
|IE00B99K4563||Neuberger Berman Emerging Market Debt – Hard Currency Fund||Emerging market fixed income||3.19%*||0.32*|
|KYG7273W1078||Prosperity Cub Fund||European emerging market equities||12.02%**||0.28**|
*Data obtained from Morningstar on June 25, 2020. **Data obtained on June 18, 2020.
Templeton Frontier Markets Fund
Commentary of Bassel Khatoun, Managing Director, Frontier and MENA, Franklin Templeton Emerging Markets Equity
Frontier markets’ ability to deal with the pandemic has improved compared with previous crisis periods. Thanks to decisive containment measures, Vietnam has very successfully flattened the COVID-19 curve resulting in a strong economic recovery led by domestic consumption. In recent years, we have also observed substantial economic reforms in countries like Egypt, which has significantly reduced its external vulnerabilities while building up its international reserves. Similarly, Peru’s reasonably healthy finances has enabled it to roll out robust economic support to confront the pandemic.
While the economic impact of the virus is expected to weigh on many frontier markets in the near term, we believe that the secular trends we have been witnessing for some time are likely to remain intact. We expect young and growing populations to drive structural demand for consumer staples, banking products, healthcare and other goods and services in markets that remain underpenetrated.
In many cases we see frontier markets leapfrogging developed markets in terms of their technology (e.g. mobile banking) and this has proved to be a strong catalyst in unlocking potential and spurring growth.
Strategy of the fund and main positions
We remain overweight Asian frontier markets, like Vietnam and Philippines, due to their high growth potential, economic resilience in the face of the pandemic and lower dependence on commodities.
Our clear preference is to be in domestically driven stories with high structural growth rates that will be transformed positively by government policy to unlock their potential. Consumer staples, consumer discretionary and healthcare all fall into this category.
As a whole, we believe that our focus on companies with sustainable earnings power, trading at what we consider to be a discount to their intrinsic worth, should help us navigate this uncertain period.
Neuberger Berman Emerging Market Debt – Hard Currency Fund
Commentary of the asset management team
The coronavirus outbreak will likely result in a very significant drop in global GDP growth in the first half of 2020 due to the substantial demand and supply side disruptions globally. While economic growth in Asia might remain above 0%, Latin America will be hit hardest as a region also given limited room for fiscal stimulus. However, our base case is for a gradual recovery later in the year, assuming that the virus will be contained in the coming months. This is also thanks to support by aggressive monetary and fiscal policy stimulus efforts globally.
On top of that, during this period different emergency policy instruments from multilateral lenders like the IMF and World Bank have been put in place to support a number of the more challenged EM countries as well. Also EM bilateral debt payments have been postponed to alleviate near term cash flow pressures.
Beyond the countries already in default like Lebanon, Argentina and Ecuador (which has created upside given recovery scenarios) we see material risks in countries like Zambia, Mozambique and Surinam to which we have no exposure currently. Countries that have a close working relationship with the IMF generally are better positioned to draw upon international resources, another reason to prefer reforming countries like Ukraine, Sri Lanka and Angola for example amongst the more challenged HY countries.
High Yield names generally are still very attractively priced, leaving ample room for normalization where IG names have already recovered to a greater extent, though both categories are still attractive versus Developed Market credits. While outflows from EM had been dramatic in the sell-off, the return of flows has been tepid so far. In that context we believe when growth returns this leaves potential in terms of excess returns.
Prosperity Cub Fund
Commentary of the emerging market fund team
The last of the emerging market funds is the Prosperity Cub Fund. Prosperity’s investment philosophy is based on a long-only, bottom-up, fundamental-value, active investment approach, with a focus on Russia and FSU.
We seek to benefit from the significant value generated from the ongoing modernisation and consolidation processes in our companies as they transition from Soviet-era ‘production units’ to modern, ‘Western-style’ corporations.
Prosperity has been operating in the Russian and FSU markets since 1996 and our expansive corporate contact network enables us to identify qualitative changes within the companies. We are often a large minority shareholder and we actively work with companies, advising them on corporate strategy, governance and finance. Such engagement further informs our investment analysis and allows us to better understand and manage corporate governance risks.
As a result, The Prosperity Cub Fund tend to be concentrated and highly divergent from the major indices.
We have seen tremendously improvements in the region over time, and we believe that Russia and Russian companies are well placed to face the current challenging market.
Russia is today one of the most fiscally sound nations in the world. It has run a significant budget surplus for several years and accumulated significant reserves (c. USD 55o bn). Net government debt is close to zero and the consolidated budget was planned to balance at an average Urals oil price of USD 42 per barrel in 2020. As such, Russia can support low oil prices for an extended period without serious economic consequences.
Russian companies have successfully managed to go through several crises before and currently benefit from strong cash flow position, almost no currency mismatch and close to zero leverage.