Following a surprise move by China’s central bank to weaken the renminbi, emerging markets plunged into bear territory earlier this week as markets expect other EM central bankers to devalue their own currencies.
On Thursday, the People’s Bank of China restored market confidence by quashing reports of about a rumoured 10% devaluation of the Chinese yuan.
However, the outlook for economic growth across many emerging markets does not look inspiring. Furthermore, a US rate hike could impact emerging market currencies and assets.
Amid these developments, FSA compares the AB Emerging Markets Growth Portfolio and the Fidelity Emerging Markets Fund, which look for investment opportunities in emerging markets.
Both funds have a long track record and similar investment approach. Given the increasingly negative sentiment toward emerging markets, which fund would suit investors’ needs better?
Luke Ng, senior vice president at FE Advisory Asia, has provided a comparative analysis.
Investment strategy review
Both funds use the MSCI Emerging Market Index as the benchmark index.
The AB fund intends to build a portfolio of 60-90 stocks while the Fidelity fund manager tends to hold 60-120 stocks.
They also both look for similar criteria when selecting stocks.
The AB fund team aims to identify stocks that offer long-term growth, strong and sustainable competitive advantage, high return on invested capital and free cash flow generation, according to Ng.
The team looks at both valuation and risk/reward opportunities.
“The fund has a bottom-up focus, and sector and geographical allocations are mainly driven by stock selection,” said Ng.
The Fidelity fund takes a very similar approach.
Nick Price, the fund manager for the Fidelity fund, works with his team to focus on quality stocks that offer downside protection and growth by compounding the returns.
“To achieve this, the team seeks to identify stock opportunities that are characterised with superior and sustainable return on assets that can withstand competitive pressure, have long-term growth opportunities, strong and unleveraged balance sheets, shareholder friendly management, and reasonable valuation over a full economic cycle,” said Ng.
Price aims to invest in the best ideas that are recommended by the three teams focusing on Latin America, emerging EMEA (Europe, the Middle East and Africa) and emerging Asia, Ng added.
Since the two funds have a similar investment philosophy, portfolio characteristics are also alike.
“Both funds are biased toward large-cap and growth stocks, and are holding relatively concentrated portfolios of around 70-80 stocks at the moment.”
Both funds are overweight the consumer discretionary and technology sectors against the benchmark index, but the Fidelity fund has a relatively stronger overweight in the consumer discretionary sector.
In terms of geographic break-down, India is a major overweight for the AB fund whereas the Fidelity fund has a stronger focus on South Africa.
Snapshot of portfolio allocation
Source: Fund fact sheets on 30 June