Australian Financial Review, Managed Funds Quarterly, May 2008

The thing about emerging markets is you can get them very right or very wrong. According to data from Morningstar, returns for the year to March 31 among emerging markets funds range from 17.2% down to 0.76%; and for Asia funds, from a 12.25% gain to a 2.35% loss.

That’s the nature of markets that offer a host of investment opportunities, but a great deal of volatility and risk. And the strange thing is that, although the source of malaise in world markets has chiefly been US sub-prime and US slowdown, it’s the smaller markets that have been hit harder.

So, for example, while the US S&P 500 was down 6.3% from January 1 to April 22, Hong Kong was down 10.3%, Japan 11.5%, India 17.3% and China 36.8%. For all that emerging markets – with their increasingly wealthy populations, impressive industrial output and healthy corporate earnings – are expected to be drivers of world growth, they are not, at the moment, drivers of world stock market performance. Partly, this reflects an aversion to risk among international institutional investors, who have been stung by sub-prime and other global shocks, and are retreating to safer assets; emerging markets, for all their long term fundamentals, don’t fit the bill.

Different funds have positioned themselves in different ways for opportunities in emerging markets. At the top of the pile, returning 17.2% in the year to March 31, is the Macquarie-Globalis BRIC Advantage Fund (hedged). Globalis uses a top-down, thematic approach to investing – that is, looking at fundamental country analysis within a broader global macroeconomic context, rather than starting out looking for attractive stocks. Its last published update was for the December rather than the March quarter, but then the key contributors to performance were Russia (particularly Mobile TeleSystems and Vimplecom) and India. There is much cynicism about the BRIC concept – and this one actually goes beyond the Brazil, Russia, India, China core by investing in places like Korea too – but it seems to have worked over the last  year.

Fidelity’s two emerging market country funds, for India and China, have also done well – Fidelity China Fund is up 12.25% in the year to March 31 despite losing 26.92% in the last six months of that period. Its India fund is up 11.73%.

Another strongly performing fund is the Platinum Asia Fund, up 12.18% in the year to March 31 and notable for a fairly modest 6.94% decline in the last six months. Portfolio manager Andrew Clifford takes a somewhat contrarian approach. “The story of China and India’s growth is well known, and in our approach the obvious things aren’t the most interesting,” he says. “We do have positions in China, but they are out of favour areas, like auto stocks, which have been relatively poor performers in spite of a decent auto market.” Taiwan is another area of interest. “Until recently it has been a market in the doldrums, but what we are waiting for is consumer and business confidence to pick up. Since the last elections [a new president was elected in March] you are already looking at much improved relations with China.” Thailand has been a similarly out of favour market which is improving now that an elected government is back in place.

At the other end comes the Advance Asian Equity Fund, down 2.35% in the year to March 31. This fund is managed by Maple-Brown Abbott. Advance does not disclose its holdings, but we can get a sense of the likely positions from Maple-Brown Abbott’s own Asian Investment Trust, which at March 31 had its biggest positions in South Korea, Hong Kong, China, Singapore and Taiwan. Its biggest individual holdings then were China Mobile, DBS (the biggest bank in Singapore), Gome Electrical Appliances, Hutchison Whampoa and Kookmin Bank.