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Faith in long-term growth feeds multi-managers' confidence in emerging markets

A number of multi-managers are growing bullish on emerging markets, believing in their long-term potential despite recent underperformance compared with Western equities.

Faith in long-term growth feeds multi-managers' confidence in emerging markets

A number of multi-managers, such as Toby Ricketts (pictured), are growing bullish on emerging markets, believing in their long-term potential despite recent underperformance compared with Western equities.

Emerging markets have underperformed Western markets over the past year but their long-term growth story remains intact in some multi-managers’ eyes, and they are becoming increasingly bullish on the sector.

For example, Toby Ricketts, chief executive of Margetts Fund Management, who manages a range of multi-manager funds, has 24% emerging market exposure in his £70 million Venture Strategy fund and is considering increasing it to around 40%.

Waiting on China

Ricketts said he was waiting for the new leadership in China and further signs of growth before committing his cash, as the delay in the appointment of a new leader had created some uncertainty. ‘But there is a lot China can do to stimulate the economy,’ he said. ‘We think there will be lots of inflationary policies when the new leadership is installed.’

Ricketts said that, although emerging markets had not performed as well as the US over three and five years, they had beaten the US over four years and would benefit increasingly from a global recovery.

‘Emerging markets are always more susceptible as they are small, risky and, as fear grows, people move their cash to perceived safe areas like the US and the UK,’ he said.

‘But we are nearing a point in the US where, even though it’s one of the better performing Western economies, it’s starting to look fully valued in the short term, so there are opportunities to increase weightings in emerging markets.’

Ricketts invests in funds such as UBS Emerging Markets Equity Income, which focuses on dividends, and Aberdeen Emerging Markets, which he said was well diversified.

He has recently added Somerset Emerging Markets Dividend Growth to his collection, a replacement for the volatile JP Morgan Emerging Markets fund, and said it would be the first in line to receive an increased weighting.

The Margetts Venture Strategy fund has returned 74.1% over three years, just ahead of the FTSE World, which delivered 72.76% over the same period.

 

Wary of macroeconomics

The multi-manager team at Cazenove are more concerned about China’s prospects than Ricketts, but are confident about long-term emerging market opportunities. Cazenove analyst Joe Le Jehan (pictured) said the team was reconsidering its more bearish position of the past.

‘The long-term emerging market growth story is intact, but we are conscious of places like China, with this shift of industrialisation to a more consumer-driven economy, and we’re saying this shift won’t be as smooth as people think,’ said Le Jehan. ‘We don’t like some of the macroeconomics and there are better opportunities elsewhere, like in Europe and Japan. Emerging markets are down 5% this year, and the US and Europe are up double digits.’

The Cazenove Multi-Manager Diversity fund fell short of the LCI FTSE AS/WexUK/Govt/ML Non-Gilt index over three years, as they returned 37.7% and 49.41% respectively.

Watching valuations

Daniel Lockyer (pictured), co-manager of the £8 million Hawksmoor Distribution fund and the £27 million Vanbrugh fund, said he may move into emerging markets in both these funds in the future.

‘We’re more likely to go into an emerging markets income vehicle in the Distribution fund, but we feel we could time it better and valuations would have to be cheaper to justify it,’ he said.

‘We are positive on equities generally, so we still see the US making money, but there looks to be a valuations difference that will catch up as confidence improves [elsewhere],’ he said. ‘We will maybe go back to high-octane emerging market funds in the future.’

The Phoenix Hawksmoor Vanbrugh fund has returned 67.19% over three years, compared with the FTSE APCIMS/Balanced index, which returned 56.47% over the same period.

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