Data produced for Financial News by Morningstar shows US bond manager Pimco, a long-standing Arnott associate, achieved 49.9% for its RAE Fundamental Plus EMG Fund.
A fact sheet for the fund says it invests in equities in line with advisory firm Research Affiliates’ fundamental indices – which weight firms by sales, cash flows and fundamental measures – with an active bond strategy bolted on. The plain vanilla Rae Fundamental Emerging Markets fund came second with 48.3%.
The MSCI Emerging Market Index turned on January 20 following a slide triggered by fears over China growth and the impact of tighter monetary policy in the US. But the performance of the Pimco/Research Affiliates fund’s was significantly ahead of the index’s 30% growth.
Other managers with funds near the top of the post-January 20 performance table also use Arnott’s fundamental index, according to spokespeople and fact sheets. They include BlackRock (47.8%), UK boutique Henderson Rowe (46.9%) and US wealth adviser Charles Schwab (46.9%).
The Morningstar data, based on dollar returns, excludes country funds and minnows of less than $ 100 million.
Rob Arnott’s fundamental indices take weightings in stocks according to their underlying value, rather than the market capitalisation. The slump in emerging market stocks since 2012 left them trading at a big discount to cap-weighted indices early this year.
Arnott started the year convinced emerging market stocks would snap back, based on their cyclically adjusted price-to-earnings ratio of eight, a long-term measure of equities markets in part based on the work of Nobel Laureate Robert Shiller of Yale.
He told FN on January 15: “History teaches that 10-year real returns are usually negative from a starting Shiller P/E above 25, and are north of 10% per year from a starting P/E of 8. Fear creates bargains. Buying in the face of fear drives successful investing.”
He was unavailable for further comment.
Following a bleak start to the year, emerging market stocks and bonds started to recover slowly, but steadily, after the turn. Their price accelerated during the summer, despite a sluggish performance from China, as investors scoured the world looking for cheap, but sound, investments with interest rates set to stay low for longer.
Funds which invest in good quality stocks have performed well over the period. Overweight positions in Arnott’s indices are led by Chinese technology giant Tencent, Samsung Electronics and Taiwan Semiconductor.
According to Morningstar, global emerging market equity funds saw inflows of $ 6.2 billion in the year to July, ranked third behind multi-strategy and alternative funds.
Emerging market specialist Aberdeen Asset Management has seen its shares rise by 51% to 326p since January 20.
Pimco chief investment officer Daniel Ivascyn told FN in March that his firm was researching opportunities in emerging markets and energy. BlackRock, Goldman Sachs Asset Management and Pictet were taking a view a month later, according to FN on April 6.
Encourged by the recovery, an increasing number of strategists have been praising the region’s prospects. Richard Turnill, BlackRock global chief investment strategist, has decided to upgrade emerging markets prospects to overweight, according to a strategy note published on August 22. He said risk appetites were growing, even in China.
Putting Arnott to one side, people familiar with JP Morgan Asset Management, placed fifth in Morningstar’s table, said currency factors boosted JP Morgan’s Japan-based BRICS5 fund, which invests in Brazil, Russia, India, China and South Africa. It returned 46.8% in dollar terms.
The top performing active fund in the Morningstar data set, placed seventh, was the NFU Mutual emerging markets led by Matthew Bennett, which produced 44.7%, representing a smart recovery from recent years. According to a fact sheet published on July 31, the fund invests directly, or indirectly, in emerging market opportunities. Bennett declined to comment.