Posted inChinaEmerging MarketsEquitiesTechnology

The secret to EM equity outperformance revealed

The index has returned 26% in dollar terms year-to-date, beating all other major asset classes. But if you had been overweighting the largest country, sector and stock in the index, you would have delivered even better performance.

China, tech and Samsung

Strikingly, the 10 global emerging market equity funds that have generated the best performance year-to-date, according to Morningstar data, all have an overweight to China, the biggest constituent in the MSCI EM Index (with a weighting of 27.9%). And a bet on China has been a profitable one this year (see chart below).

The majority of the 10 best performing funds also have an overweight to the biggest sector in the index: information technology. Like their US counterparts, Asian tech stocks have strongly outperformed all other sectors year-to-date, and funds with large exposure to such companies have benefited.

The top-performing funds do not only overweight the largest country (China) and largest sector (tech). Perhaps the most astonishing fact of all is that the 10 best-performing funds all overweight the largest single stock in the index too.

Just in case you didn’t know which stock this is: it’s Samsung, the Korean tech giant which dominates the MSCI EM index with a weighting of 4.35%. For none of the 10 best performing funds this year, however, this hefty weighting was satisfactory.

And credits to them, as Samsung has produced a return of more than 30% in dollar terms this year, despite the fact that the company’s top executive recently got sentenced to five years in jail for bribery.  

The JP Morgan Emerging Markets Opportunities fund, one of few top-performing funds without an overweight to the information technology sector, has the smallest overweight (5.2%). This year’s best-performing EM equity fund, the Baillie Gifford Worldwide Emerging Markets Horizon fund (+39.9%), even has an 8.7% allocation to Samsung.   

Name Return YTD in $ Annualised  3 Yr rtrn in $
Baillie Gifford WW Em Mks Horizon B USD 39.88  
Principal Origin Glbl Em Mkts I Acc USD 39.24 4.74
William Blair SICAV Emerg Mkts Gr I 37.48 2.78
Vontobel mtx Sust Emerg Mrkts Ldrs B USD 37.06 11.66
UBS Global Emerging Markets Opp I-B 36.43 9.59
UBS (CH) IF Eqs Em Mkts Glbl I-X 36.14 9.26
JPM Emerging Mkts Opps A (acc) USD 35.74 3.72
Delaware Invmts Em Mkts F USD Acc 35.36 3.35
Am Century SICAV – Em Mkt Eq B USD 35.36 5.72
Baring Global Emerging Markets A USD Inc 35.28 5.06

 

It would probably not be fair, however, to attribute the outperformance of this year’s top funds fully to their overweights to China, tech and Samsung. All of this year’s 10 top performers (apart from the Baillie Gifford fund which doesn’t have a three-year track record) also beat their benchmark over three years, and almost half of them (marked green in the table above) are also in the top-10 over this period.  

Part of the Bonhill Group.