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A rocky year for emerging market funds

jnelson@globeandmail.com

What are we looking for?

Emerging economies were unstable places to invest in 2013 as political instability, policy changes and volatile global commodity prices rocked equity markets. We look for the funds that weathered the storm best.

The screen

We searched for the top 15 emerging market funds for the year ended Jan. 31. U.S. dollar, segregated and duplicate versions were excluded, as well as those closed to new investors or with minimum investments over $25,000.

What did we find?

Emerging market funds struggled in 2013 and not all of them ended the year in positive territory. But despite the challenges, portfolio managers say the long-term investing outlook is good. The Mackenzie Cundill Emerging Markets Class Series A was the top performer with gains of 7.3 per cent in the year to Jan. 31, followed by the Trimark Emerging Markets fund, which rose 6.6 per cent in the period.

Jeff Feng, portfolio manager for the Trimark fund, said that there were pockets of strength in his portfolio in the past year, such as investments in South Korean technology companies that benefited from both the falling won and the country's growing IT sector. The fund had more money invested in South Korea than any other country at the end of the year.

Avoiding commodities and focusing on businesses that cater to the rising middle class in these emerging economies also helped the fund produce gains and avoid losses, Mr. Feng said. "In our investing philosophy we like consumer-related businesses better," he said. "Their business model, in our opinion, is more sustainable, management quality is generally better."

The fund's largest holding at the end of the year was Samsung Electronics Co. Ltd., in preferred shares.

What's ahead for the coming year in emerging markets?

Diversification by region and currency will be important, and Mr. Feng said investing in quality companies will help long-term returns. "The whole emerging market story is still very attractive," he said. "If you look at GDP projections, [emerging markets'] growth will be faster, ranging from 4.5 to 5 per cent on average, versus most of the developed market [at] below 2 per cent."

James Moreton, portfolio manager of Mackenzie's fund, is focused on how cheap or expensive investments appear to be. "Today, most traditional valuation metrics suggest that emerging market equities are cheap relative to both their history and developed markets," he wrote in a recent note to investors. "When looking at future returns over any reasonable time period, say three to five years, one thing matters more than any other: valuation, valuation, valuation."

*****

TOP EMERGING MARKETS EQUITY FUNDS

% return (Jan. 31)% returnMERAssets
FundSym1-yr3-yr5-yr10-yr2013201220112010%($-mil)
Mackenzie Cundill Em Mkts Cl Sr A7.2%-1.6%14.2%9.7%12.3%-29.7%39.2%2.88216.4
Trimark Emerging Markets Class6.5%-3.8%10.8%6.5%-25.5%2.733.6
Brandes Emerging Markets Equity5.3%-0.3%16.0%7.3%13.3%10.4%-19.8%10.2%2.7207.0
Excel Emerging Markets4.2%-2.7%10.3%2.0%-17.5%2.975.9
SEI Emerging Market Equity-O3.1%0.1%11.9%7.6%8.7%15.3%-20.0%11.9%0.18198.9
Redwood Emerging Mkt Dividend2.2%2.3%1.7%13.3%-9.0%3.435.7
Renaissance Emerging Markets Cl A2.0%-3.1%9.4%4.8%5.4%12.5%-22.9%9.6%3.0410.6
RBC Emerging Markets Equity Fund-A1.9%1.7%4.8%17.7%-15.7%2.41,538.6
Russell Emerging Mkt Eq Pool-A1.5%-1.9%11.4%5.9%5.3%12.4%-20.3%8.3%3.0431.1
TD Emerging Markets Inv Srs1.4%0.6%11.2%6.4%3.9%15.6%-17.4%10.8%2.88142.3
iShares EmrMrkts Min Vol IndexXMM-T0.1%4.7%0.7930.6*
CIBC Emerging Markets Index A-0.5%-1.0%10.0%7.4%2.7%14.2%-16.8%10.5%1.36100.5
Signature Emerging Markets-0.7%0.4%11.9%6.0%3.1%14.3%-16.9%11.5%2.72134.5
BMO Emerging Markets Equity ETFZEM-T-0.9%-0.9%3.5%13.6%-17.1%11.9%0.6178.4
Excel BRIC-1.5%-3.9%6.6%12.9%-27.2%6.3%3.338.8
MSCI Emerging Markets Free ($ Cdn)2.4%0.9%12.7%8.5%3.9%15.6%-16.4%11.8%
MSCI World ($ Cdn)29.9%13.8%14.5%5.1%36.2%14.0%-2.9%6.8%
* Assets from Dec. 31, 2013. Source: Lipper. Data compiled by: Wei Sun.

© 2007 The Globe and Mail. All rights reserved.

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