Key Points:

- Five of eight GEM funds outperformed the benchmark in 2011, on a calendar year basis
- On a 5-year basis, funds with repeated outperformance include First State GEM Leaders, Aberdeen Global Emerging Markets, Fidelity Emer Mkt A-SGD, Schroder Emerging Markets Fund and RIC Emerging Markets Eqty ClJ USD
- On a 5-year annualised basis, two recommended funds beat the benchmark return of -0.86%: First State GEM Leaders (4.08%), Aberdeen Global Emerging Markets (4.43%)
- In terms of expense ratios, First State GEM Leaders, Aberdeen Global Emerging Markets and RIC Emerging Markets Eqty ClJ USD have the three lowest expense ratios

A recent article puts forth the argument that at around 1.55X, PB ratios of Emerging Markets (EMs) are attractive from a valuations perspective (link).

To take the discussion further, this article will look at the EM equity funds available on the platform, and compare how they have performed against one another.

If you’ve been tracking the performance of EM funds, you’ll know we’ve written quite extensively about the performance of EM funds in 2010 (link) and again in September 2011 (link). Each time, several funds have come out ahead of the rest, and at the close of 2011, these funds have apparently developed a habit of outshining the rest.

So let’s start with 2011 performance.

The Correction of 2011

After the recovery of 2009, 2010 saw moderating returns, and 2011 saw a correction of -17.56% (as at end-2011). Despite the market (represented by the MSCI Emerging Market Index) correction, many funds managed to outperform the market. Table 1 compiles the 2011 returns of the equity funds with a 5-year track record, available on the platform.

Five of eight funds with a 5-year track record outperformed the market in 2011. These funds include our recommended funds – First State GEM Leaders, Aberdeen Global Emerging Markets – as well as funds such as Schroder Emerging Markets Fund, Fidelity Emer Mkt A-SGD and RIC Emerging Markets Eqty ClJ USD.

For a more comprehensive comparison of calendar year performances, we look at calendar year performances of the past 5 years, from 2007 to 2011. Table 1.1 displays the calendar year returns for the funds.

Looking at the past 5 years shows Aberdeen Global Emerging Markets outperforming in four of the last five years. Funds that outperformed in three of five years include First State GEM Leaders, and Fidelity Emer Mkt A-SGD.

Funds that outperformed in two of five years include Schroder Emerging Markets Fund, and RIC Emerging Markets Eqty ClJ USD. Funds that outperformed in one of five years include JPM Emerging Markets Equity A (dist) USD and HGIF Glb Emg Mkts Eq-AD SGD.

Calendar years give an indication of how funds perform on a yearly basis, a fairly short time frame. To appreciate the funds’ performance over longer periods, we consider the annualised return of the funds, as shown in table 2.

Annualised return looks past the volatility of yearly spikes and dips, and represents a single yearly return compounded over 5 years. This gives a better indication of the return experienced by investors with a 5-year time horizon.

Looking at table 2, two funds – Aberdeen Global Emerging markets, and First State GEM Leaders – managed to outperform the index by a convincing margin of 5.29% and 4.94%.

Looking at returns on a calendar year and annualised basis suggests that of the eight funds we examined, two stand head and shoulders above the rest.

This isn’t to say that the other funds can’t perform.

One strong fund is RIC Emerging Markets Eqty ClJ USD, which has kept pace with the benchmark over a 5-year time frame, underperforming by a margin of less than 0.10pp (percentage point, the arithmetic difference between two percentages), and in at least one year (2009) returned a very strong return of 80.67%.

Another contender is Fidelity Emer Mkt A-SGD, whose performance was dampened in 2009 when it underperformed the rally in 2009, but has since outperformed the MSCI EM Index in 2010 and 2011.

Expense Ratios

Expense ratios are a fairly straightforward measure – low cost is better than high cost.

Table 3 summarises the expense ratios for the funds we’ve looked at.

From Table 3, the majority of funds maintain a lower-than-average expense ratio. The lowest expense ratio held by RIC Emerging Markets Rqty ClJ USD at 1.66%. Both Aberdeen Global Emerging Markets (1.79%) and First State GEM Leaders (1.87%) also keep their expense ratios below average, and when coupled with their performance, clearly establish an edge over their peers.

Summary
With that, we’ve examined the Emerging Market Equity landscape, and come up with two giants in the space – Aberdeen Global Emerging Markets, and First State GEM Leaders – as well as several equally competent funds that could, under the right circumstances, surge ahead.

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