Key Points:
- First State GEM Leaders performs well on a calendar year basis, beating the benchmark MSCI EM Index in 3 of 5 years
- Over a 5-year annualised return basis, the fund returned 4.08% against the benchmark -0.86%
- The fund tends to outperform in down markets

After looking at one illustrious GEM fund (link), this issue of Chart Talk brings another into focus: First State GEM Leaders.

A recurring feature in our recommended fund lists, First State GEM Leaders, has proven its defensive track record by outperforming the index during down markets. In this case, the index in question is the MSCI Emerging Market Index.

From eyeballing Chart 1, 2007 was not a great year for the fund. As the market surged ahead, the fund lagged. But in 2008, the fund outperformed in 1Q, 3Q and 4Q 2008 while the market plunged. In 2009, while the market surged, the fund underperformed in 2Q, 3Q and 4Q 2009.

2010 was mixed, with periods of out and underperformance. But 2011 saw the fund surge ahead of a volatile market in 2Q and 3Q 2011.

Historical Performance
Table 1 displays the historical calendar year performance against the MSCI EM Market Index.

From 5 years we examined, calendar returns confirm our initial observations from chart 1. The fund does well in years where the index posted negative returns, and less well in years when the index posted positive returns.

Looking at the fund’s annualised returns gives a better idea of the fund’s long-term returns by stripping out the yearly market volatility, and expressing the fund’s return in a single compounded annual growth rate. This is shown in table 2.

Table 2 clearly shows the fund’s investment process has put it ahead of the index’s performance. With a 5-year annualised return of 4.08%, the fund’s strength in downturns has given it a dominant edge over the flattish -0.86% index return.

Performance across Up-Side-Down Markets
On a quarterly basis, we divided our benchmark (MSCI EM Index) return into ‘up’, ‘side’ and ‘down’ on the following criteria: A quarterly return exceeding 2.5% is an ‘Up’ market; a quarterly return less than -2.5% is a ‘Down’ market; and a quarterly return between 2.5% and -2.5% is a ‘Sideways’ market.

2.5% is an arbitrarily chosen value, as there is no formal definition of what makes an ‘up’ market. We then looked at the performance of the fund across ‘Up’, ‘Down’ and ‘Sideways’ markets, and divided it into outperformance (fund return greater than benchmark return) and underperformance (fund return less than benchmark return).

Table 3 summarises the findings.

During up markets, the fund outperforms in 3 of 9 quarters, and on average, underperforms by -1.81pp (percentage points, the arithmetic difference between two percentages). Quite evidently, this fund, over the period of time we examined, tends to lag the market on the way up.

The fund also lags the market when it trends sideways. During side markets, the fund outperforms in just 1 of 5 quarters, and on average, underperforms by -1.46pp.

But during down markets, the fund truly shines. Outperforming in every quarter we examined, and by a commanding margin of 6.55pp, this fund will leave you looking forward to the next big correction.

Okay…probably not.

But as the performance shows, the fund has proven itself in down markets.

Fund investment information
Table 4 summarises the information pertaining to the actual transaction of the fund.

The fund can be purchased through cash and SRS. Its expense ratio is slightly lower than average. Minimum initial investment is S$1000, while minimum subsequent investment and RSP are set at S$100. Investors should note the minimum redemption is 1000 units. The minimum holding is S$1000.

Related articles:

These 2 Market-Beating Equity Funds Dominate Emerging Markets…Again

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