Rated funds review: Global emerging markets

Emerging markets suffered one of their worst periods since 2011 over the summer as fears of China's economic slowdown and its plummeting equity market sent many investors heading for the hills.

The selloff came to a head on Monday 24 August – since dubbed 'Black Monday' – when markets across the globe saw some of their sharpest declines since the collapse of Lehman Brothers bank in 2008, with China's Shanghai Composite index shedding around 8% in a single day.

Few markets have been left unscathed with the MSCI World, FTSE All Share and MSCI Emerging and Frontier Markets indices all down between 7-9% over the three months to 22 September.

However, the volatility has compounded some longer-term weakness in emerging markets, dragging one year and three year returns well below those of developed markets; in the 12 months to 22 September the MSCI Emerging Markets index has shed 7.4% compared to a loss of 0.4% from the MSCI World, while over three years it has gained just 9.3% compared to 41% from the latter.

Rated thrivers and survivors

Among Money Observer's Rated Funds within the global emerging market sectors, two held up particularly well over the summer: PFS Somerset Emerging Markets Dividend Growth and Schroder Small Cap Discovery.

Over the three months to 22 September PFS Somerset is the second best performing fund in the Investment Association's global emerging markets sector, shedding 7.4% compared to an average of 12.8% from the latter.

As is often the case in sudden downturns, the fund's income bias may have helped it to weather the storm as high growth rather than high income stocks tend to bear the brunt of a mass market exodus. The fund is, however, also an excellent long-term performer, ranking within the first quartile of its sector over six months, one year, three years and five years.

Schroder Small Cap Discovery is the best performing fund of our selection over the past three months, having lost 6.7% since 22 June. A pet project for Schroders' emerging market expert Matthew Dobbs, the fund invests largely in Asian smaller companies; however it has the ability to invest almost anywhere which makes it a particularly interesting proposition.

It has also performed relatively well since its launch in March 2012, returning 27% in the three years to 22 September which makes it the second best performer of our selection over the period.

Of those funds just surviving, Templeton Emerging Markets Investment Trust is by far the worst performer, having shed close to 20% in share price terms over the past three months. Launched in 1989, the trust has been struggling since 2010 due to long standing manager Mark Mobius's penchant for commodities – a position he has refused to budge on despite half a decade of underperformance.

Mobius is stepping down as lead manager on 1 October, to be replaced by Franklin Templeton's frontier market expert Carlos Hardenberg; whether this will be the shot in the arm the trust needs remains to be seen. For now we have placed the fund under review.

JP Morgan Global Emerging Markets Income investment trust is the second worst performer over the period, with shares down 15% in the three months to 22 September. Launched in 2010, the trust initially put in some strong performances, however it has disappointed over the past year and this has proved a significant drag on its long term returns (both share price and net asset value).

The Rated Fund proving to be the best long term winner is BlackRock Frontiers Investment Trust, with frontier market expert Sam Vecht delivering 41% in share price returns over the three years to 22 September.

While frontier markets tend to be highly exposed to commodities, Vecht has consciously steered away from vulnerable regions including Nigeria and Kuwait over the past year, focussing on regions and companies that are good value and have strong growth prospects in sectors including financials and consumer staples.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.