Three trusts for progressive emerging markets

Emerging market investment trusts are seeing new opportunities away from the usual reliance on commodities and western demand. Cherry Reynard looks at three examples.

The economies of many emerging markets are rapidly changing in terms of their main drivers and structure. They are moving away from reliance on commodities and dependency on western demand, and are increasingly innovating and catering for the diverse requirements of the burgeoning domestic market. Here we identify three emerging market investment trusts that have been moving with the times. 

Jupiter Emerging and Frontier Income

This new trust Jupiter Emerging & Frontier Income Ord launched in May of last year, aiming to achieve a 4% annual yield through a concentrated portfolio of 40 to 45 stocks across emerging and frontier markets. Manager Ross Teverson already had a strong track record on the Jupiter Emerging Markets fund. 

The inclusion of frontier markets was an unusual twist. Teverson says this gives the trust more opportunities in higher-growth companies:

"There are long-term structural changes in some of these markets – increasing financial inclusion, for example. In Nigeria and Kenya, we own what we consider to be the leading retail franchises, Access Bank and KCB. Both of them are well-positioned to benefit from the increasing penetration of financial products."

The trust will look very different from the index and doesn't currently hold any of the large Chinese internet stocks. Teverson prefers opportunities further down the technology supply chain. Biz Link, for example, is a supplier for Tesla Inc and will benefit as Tesla ramps up its production.

The trust has had a strong start, with its net asset value (NAV) total return up 12% since launch, compared to 7.5% for the wider sector. It currently trades at a small premium to net asset value. 

Fundsmith Emerging Equities Trust 

Fundsmith Emerging Equities Trust aims to give access to emerging market growth, but without some of the volatility associated with the sector. Run on the same lines as the group’s popular Fundsmith Equity fund, it follows a buy-and-hold strategy in quality businesses listed in emerging markets. 

In common with Fundsmith Equity, it has had a notable focus on consumer stocks, aiming to tap into the trend of a rising middle class. Many of its holdings are quoted subsidiaries, associates or franchisees of companies in Fundsmith Equity - Hindustan Unilever, for example. This is designed to provide reassurance on corporate governance standards and to lower the volatility of the trust. 

The trust has had a difficult start. Although absolute performance has been fine, relative performance has been lacklustre, with the fund currently sitting eighth out of 10 trusts in the global emerging markets sector over three years. Its share price is up 24.1%, compared to 33% for the wider sector over the past three years. 

Pacific Horizon 

First quartile over one, three and five years, Pacific Horizon Ord has been the one to beat in the Asia Pacific ex Japan sector. Manager Ewan Markson-Brown looks for companies that can grow meaningfully and consistently over the long term. The fund has over 50% in technology companies, including big names such as Alibaba Group Holding Ltd ADR and Tencent Holdings Ltd, but also in lower-profile companies such as Koh Young Technology and Macronix International. 

Markson-Brown believes it is an exciting moment to be an Asian investor.

He says: "The digitisation of the global economy is bringing huge opportunities. There is lots of development going on and lots of innovation driving growth."

The fund is firmly embedded in the new; emerging markets – technology, biotechnology, consumer discretionary – which has supported performance. Investors have seen the trust grow 157% over five years. 

Two generalist trusts with high EM exposure 

Scottish Mortgage With its 20% in China, Scottish Mortgage Ord (SMT) has significant exposure to some of the key technological developments in emerging markets. It has 15% of the trust in Alibaba and Tencent, and another 4% in Baidu Inc ADR. 

Murray International Manager Bruce Stout has long seen the growth opportunity in emerging markets. Murray International currently has just under a quarter of the fund in Asian equities, and another 17% in global emerging market equities. This includes names such as Taiwan Semiconductor Manufacturing Co Ltd ADR and Unilever Indonesia.