- We favour Aberdeen's disciplined and long-term investment approach
- Emerging stock markets have been volatile in recent years, but have generally performed well since February
- The fund remains positioned to benefit from an expanding middle class across the developing world
It has been a turbulent few years for emerging markets investors. Slowing growth in China, weakening currencies, tumbling commodities prices, and political upheaval has dominated the investment landscape and dampened investor sentiment. Funds investing in the higher-risk emerging region, including Aberdeen Global Emerging Markets Smaller Companies, have not been immune from the market volatility.
2015 proved a particularly difficult year for the fund. A bias towards some of the weaker-performing markets, particularly those with weaker currencies such as Brazil and Turkey, held back returns. Similarly, a lack of exposure to stronger-performing markets, including China and South Korea, also dragged on performance. However, the team at Aberdeen feel there are not enough companies in these markets that meet their strict quality criteria.
Earlier this year investor sentiment improved to the benefit of emerging stock markets, supported by stabilising commodity prices; the US Federal Reserve’s decision to delay its next interest rate rise; and the potential for political regime change in Brazil. More recently following the UK’s referendum on EU membership, sterling weakness boosted the returns from emerging markets assets for UK-based investors.
The fund has outperformed its benchmark so far in 2016, alongside a reversal of some of last year’s trends. The Brazilian and Turkish stock markets have performed well, benefiting the fund, while the Chinese stock market has been weaker. Our analysis suggests the team’s overall stock picking has also added value.
The team have initiated two new investments so far this year: AvivaSA and Coca-Cola Icecek. The former company, a Turkish insurance and pension provider, is a joint venture between the UK’s Aviva and Turkish pension business Sabanci. Assets in the Turkish pension industry have grown from close to zero to almost 40 billion lira in the past decade and are projected to reach 400 billion lira by 2023. The team believe the company is well placed to benefit from this growth.
Emerging countries continue to face ongoing uncertainties, particularly as China, which has a far-reaching impact on other developing economies, readjusts to a slower rate of growth. The team at Aberdeen is also mindful of the impact of any future interest rate rises in the US, as the vast amounts of US dollar-denominated debt held by companies in the region will become harder to service once rates rise.
Many countries are mindful of these risks, however, and have been implementing reforms that could improve the operating environment for businesses. Furthermore, aside from commodity-related businesses, the team are also encouraged that corporate earnings have on average continued to grow.
Our view on this fund
We hold Aberdeen’s emerging markets team in high regard and favour their approach of seeking high-quality businesses at reasonable valuations. The process has proven a success over the long term and since launch in March 2007 the fund has grown 156.2%* compared with 98.6% for the benchmark, although please remember past performance is not a guide to future returns. Please note that investing in smaller companies makes the fund a higher-risk proposition.
|Annual percentage growth|
| July 11 -
| July 12 -
| July 13 -
| July 14 -
| July 15 -
|Aberdeen Global Emerging Markets Smaller Companies||-1%||19.2%||-5.8%||0%||12.9%|
Past performance is not a guide to future returns.
Source: Lipper IM to *01/07/2016.
To keep the fund a manageable size and protect underlying investors, Aberdeen has sought to restrict inflows into the fund by applying a 2% initial charge. The fund therefore does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.
Please note as an offshore fund investors are not normally entitled to compensation through the UK Financial Services Compensation Scheme.