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A sea of red ink for emerging market funds

swon@globeandmail.com

What are we looking for?

Leaders and laggards among emerging-markets equity funds this year.

Stock markets everywhere have been hammered amid euro-zone debt woes and forecasts for slower growth, but equities in the developing world tend to take it on the chin harder in downturns.

The screen

We ranked the eight best and eight worst performers among the red-stained funds this year to Oct. 20. U.S. dollar, segregated and duplicate versions of the funds were excluded.

What did we find?

A dividend-focused fund bleeding less than its peers.

Redwood Emerging Markets Dividend shed only 8.8 per cent this year. Its peers posted double-digit losses, including iShares MSCI Emerging Markets exchange-traded fund (ETF), which was down 17.9 per cent.

The Redwood fund, which is nearly a year old, is a rarity among its peers, which tend to be marketed for their high growth potential as opposed to focusing on quality companies paying dividends. It will own up to 40 names, and typically avoids energy and materials stocks.

The fund has outperformed its peers this year largely because of its stock selection - it looks for companies that pay dividends, which add to returns. It also got help from shifting into a high cash position by summer, says its lead manager, Edward Lam, of London-based Somerset Capital Management LLP.

The cash level peaked at 40 per cent of the fund in July as concerns grew about slower growth in Brazil and China. "We were nervous about the markets," Mr. Lam said. "We thought the credit cycle was ending... When interest rates or policy rates start reaching their peak, then growth is highly constrained - if not in a contractionary phase."

He has now reduced cash to 33 per cent and is nibbling away at stocks in Turkey, which has devalued its currency. "Everything is 30-per-cent cheaper than we could have bought six or eight months ago," he said.

Names in his fund that have held up better than others include Shoprite, a South African retailer that is expanding to others parts of Africa; Taiwanese-based E Ink Holdings, which makes "electronic paper" displays for Amazon.com Inc.'s Kindle, and China Mobile, the world's biggest mobile operator by subscribers.

*****

LEADERS AND LAGGARDS AMONG EMERGING MARKET EQUITY FUNDS THIS YR TO OCT. 20

Last reportedYTD % rtnYTD % rtnPeriods ending Sep. 30, 2011
Fund nameMERAssets ($-mil)(to Oct. 20)(to Sep. 30)1-yr % rtn3-yr % rtn5-yr $ rtn10-yr % rtn
Top 8
Redwood Emerging Mkt Dividend Inc4.4617.0-8.8-10.0n/an/an/an/a
Desjardins Emerging Markets-A2.8472.8-11.2-12.4-11.110.0n/an/a
AGF Emerging Markets2.991,267.3-15.7-15.8-14.710.46.912.6
TD Emerging Markets2.88168.8-16.3-17.0-15.41.60.59.8
RBC Emerging Markets Equity Fund-A2.38873.8-16.9-17.0-15.1n/an/an/a
CIBC Emerging Markets Index1.32113.9-17.4-19.4-16.22.72.310.1
BMO Emerging Markets Equity ETF0.5728.6-17.9-19.3-16.1n/an/an/a
iShares MSCI Emerging Markets Index0.15196.1-17.9-22.2-19.3n/an/an/a
Bottom 8
Mackenzie Cundill Em Mkts Val Cl-A2.80197.0-26.1-27.1-17.2-3.5n/an/a
HSBC Emerging Markets-I2.9811.9-25.8-26.2-23.0-4.2-3.65.1
Manulife Emerging Markets Equity3.0910.3-25.2-27.0-24.0-1.6n/an/a
Tmpltn BRIC CC3.15299.0-24.1-25.4-20.21.53.5n/a
Excel BRIC2.9815.6-24.0-24.1-24.6n/an/an/a
Dynamic Emerging Markets Class-A2.8722.3-24.0-24.8-23.2n/an/an/a
HSBC BRIC Equity-I2.7784.1-23.1-23.8-23.6-0.7n/an/a
Claymore BRIC ETF0.66221.3-22.7-26.5-22.9-2.75.3n/a
MSCI World ($ Cdn)-7.9-3.0-0.2-3.10.0
MSCI Emerging Markets Free ($ Cdn)-17.8-14.65.93.711.7
Source: Globe Investor

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