Rated Funds 2014: Five emerging markets funds

There are many attractions to investing in emerging markets funds and trusts. They enable you to gain a stake in the world's most rapidly growing economies and they have produced impressive performance for investors.

Indeed, such has been the popularity of investing in emerging markets funds in recent years that many of the leading funds have had to "soft close" to new investors as they have reached capacity. However, any type of investment that shows large gains can also show considerable volatility.

Although there has been talk of the emerging markets having "decoupled" from western markets and developing a momentum of their own as their middle classes expand and consumerism takes off, their financial markets tend to be vulnerable to changes of sentiment among western investors.

To find out the methodology behind Money Observer's Rated Funds, read: How 2014's Rated Funds were chosen.

Taper concern

Concerns about the effects of the tapering of quantitative easing by the US have been among recent problems affecting these markets. In view of these uncertainties and current investment conditions, we have rated fewer emerging markets funds this year.

Advance Frontier Markets IT

This trust is a Money Observer Editor's Selection. It offers investors the chance to gain exposure to pre-emerging markets in Africa, the Middle East, Eastern Europe, the Far East and Latin America.

The Advance Frontier Markets adopts a fund of funds approach, thereby gaining exposure to a very diverse range of companies and utilising the expertise of locally based managers. Manager Slim Feriani believes local experts are in the best position to recognise the pricing anomalies in their local markets and take advantage of them.

The trust holds a mixture of open- and closed-end funds. Discounts on the latter are seen as an opportunity to add extra value for investors.

Fidelity Emerging Markets

This fund is another Editor's Selection. Many of the leading emerging markets funds have soft closed in recent years as they have reached capacity. The Fidelty Emerging Markets fund has been somewhat overlooked due to its relatively short record under manager Nick Price, who was appointed four years ago, but it is now performing strongly.

Utilising Fidelity's teams in local markets, Price seeks to invest in the best from Latin America, Emerging Europe, the Middle East, Africa and Emerging Asia. He favours companies with strong market positions and competitive advantages, as these are typically able to deliver attractive earnings throughout the economic cycle.

Judicious company selections last year helped the fund avoid the worst of the tapering fall-out on emerging economies.

Somerset Emerging Markets Dividend Growth

The Somerset Emerging Markets Dividend Growth fund is a current member of our Premier League. It is managed by Edward Lam of Somerset Capital Management, a London and Singapore-based investment boutique which focuses on emerging market equities. Lam's strategy is a defensive one based on capital preservation, so he warns that the fund won't be the best performer in raging bull markets.

The group's investment process focuses on picking well-managed, cash-flow generative companies at the right price. Lam points out that there is a significant and growing pool of well-managed companies in emerging markets, and in attractive sectors such as retail or telecoms, committed to paying an increasing dividend year after year.

Templeton Emerging Markets IT

This trust is included in two of Money Observer's model growth portfolios. It is one of the oldest of its type and has an impressive long-term track record. The Templeton Emerging Markets trust has been managed by Mark Mobius since it was launched nearly 25 years ago. He is supported by a large and well-resourced team of investment researchers around the world, who look for companies trading on discounts. The trust has a high-conviction portfolio of around 50 holdings.

Investments are held for the long term and the trust's turnover is low - 5% in its last financial year. However, there is also a clear selling discipline and each holding has a share price target.

Utilico Emerging Markets IT

The Utilico Emerging Markets trust was the winner of our best diversified emerging markets trust award last year. It invests predominantly in listed companies involved in infrastructure, utility and related sectors, mainly in emerging markets.

The management team, led by Charles Jillings, seeks to minimise risk by investing mainly in companies and sectors that provide essential services, such as transport, infrastructure or communications.

These companies are capitalising on growing populations and living standards in the emerging markets. Just over 20% of the trust is currently in ports, while water and waste make up another 15% of the portfolio.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.