The accepted wisdom of fund managers is to avoid most new issues when they are plentiful, but invest when they are few and far between. On that basis, Ashoka WhiteOak Emerging Markets (AWEM), which raised just £31m in its April flotation, is a surefire winner as the only new investment trust since 2021.
The performance of emerging markets since 2012 has been dire. They have underperformed developed markets by around 60%, losing nearly all the outperformance not just since 2000 but also since 1987.
Since then, there have been two huge booms (1987-1994 and 2002-2011) followed by two huge busts. ED Butchart, Chief Investment Officer of Kepler Partners, attributes these busts to the reversal of speculative fund flows to emerging markets in the boom years and a fall in profit margins. While margins of US companies have risen from 6.5% in 2009 to 12%, those in emerging markets fell to 6% in 2016 (there has since been an erratic recovery).
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As a result, he says, the US trades on a cyclically-adjusted price/earnings multiple of 24 while emerging markets trade on 11, a 25-year low. There is no guarantee these will converge, but Butchart thinks a combination of continued growth and a weaker dollar herald better times.
Louis Gave of Gavekal implies that a bull market has already started. He notes that emerging market bonds have outperformed US Treasuries by 20-50% in the last 18 months while the performance of the Mexican, Indian, Brazilian and Indonesian stock markets have out-performed or matched the US market. The broader emerging index is China-dominated but China, which still accounts for 30% of the index, has performed terribly since 2020.
Investment trust exposure to China is key
Better Chinese performance would be good news for the larger emerging market trusts, Templeton (TEM) and JP Morgan (JMG), which have struggled due to their exposure to the region during the past three years.
Specialist trusts, Mobius Investment Trust (MMIT) with £150m of assets has returned 11.7% per annum over the last three years and Utilico Emerging Markets (UEM), with £540m, has returned 10.8% (both including dividends). Both are currently trading at discounts, the latter with a dividend yield of 3.8%, at a generous 12% discount.
MMIT, headed by Mark Mobius, who launched TEM in 1989, and managed by his former colleague there, Carlos Hardenberg, owns just 26 growth-orientated companies. Nearly two-thirds of the portfolio is in technology and 15% is in healthcare. The companies are small to mid-cap, with little to no debt and profit margins averaging 16%, so there is very little overlap with the MSCI Emerging Markets index. Few of the portfolio names will be familiar to well-informed investors.
“We don’t like banks and our limited Chinese exposure is Hong Kong, not mainland listed” but “this is a good time to be buying quality assets” so there is still plenty to choose from. Most importantly, management, mostly Mobius himself, has £40m invested in the trust.
UEM is very different, investing in utilities, whose performance lagged when emerging markets were on a roll but has accelerated in recent years. Utilities include logistics, ports, airports, data services and digital infrastructure as well as gas, electricity, water &waste and telecoms. This means that there is plenty of growth in the portfolio; emerging markets are decarbonising just like developed markets and strong economic growth means that demand is not mature even for basic infrastructure. 23% of the portfolio is in Brazil, 15% in China and 11% in India.
These trusts are not alternatives to TEM, JMG or other generalist or index funds but complement them. But keep an eye on the Ashoka trust -history is on its side.
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