It is only the first few weeks of 2023, but markets have already begun to recover from last year’s lows, with emerging markets rebounding more than 20% from their nadir.
Emerging markets fared better than their developed market peers in 2022 in some respects. According to FE fundinfo data, three of the top five best performing equity sub-sectors in 2022 were emerging market countries.
Industry professionals also share the optimism towards emerging markets.
Joseph Little, global chief strategist at HSBC AM, told FSA that he believes emerging markets have demonstrated resilience in 2022 and this is likely to continue into 2023.
“The outlook for emerging market equities in the first quarter of next year may still be choppy, as the dollar may still be strengthening. But as the global economy enters recession and the dollar weakens, there will be major opportunities for emerging market equities,” Little said.
Supported by receding inflationary pressure, a softer dollar and China’s reopening, Raffles Family Office’s William Chow also believes equity markets are poised for recovery and Asia provides long-term opportunities across all major asset classes for investors to position for a cyclical recovery.
Against this background, FSA asked Mathieu Caquineau, director of manager research at Morningstar, to select two emerging market equity funds for comparison. He chose the Capital Group New World fund and the T Rowe Price Emerging Markets Equity fund.
| Capital Group | T Rowe Price | |
| Size | $441m | $932.4m |
| Inception | 2016 | 2004 |
| Managers | L Thompson, K Spence, R Lovelace, J Knowles, W Kwan, C THomsen, T Tani, B Freer, C Kawaja. A Shiraishi, P Phanaphat, D Justus | Eric Moffett, Malik Asif |
| Three-year cumulative return | -0.56% | -7.87% |
| Three-year annualised return | 0.57% | -6.31% |
| Three-year annualised alpha | 2.98 | -4.04 |
| Three-year annualised volatility | 21.82% | 21.96% |
| Three-year information ratio | 0.33 | -0.66 |
| Morningstar star rating | ***** | ** |
| Morningstar analyst rating | Bronze | Neutral |
| FE Crown fund rating | ** | * |
| OCF (retail share class) | 1.90% | 2.04% |
Investment approach
T Rowe Price is managed in a typical bottom-up fashion with a focus on stocks with durable growth.
The portfolio is predominantly invested in large companies and comprises 80 to 90 stocks typically.
The fund is more focused on select sectors, with around 60% of its assets under management (AUM) allocated to the top three sectors: financials (22.8%), information technology (20.3%) and consumer discretionary (18.2%).
The strategy focuses on stocks with durable growth with the fund manager looking for industry leaders with strong growth prospects while paying attention to valuations.
Similarly, Capital Group also favours diversification in its stock picking and is focused on the larger listed stocks with growth potential.
Both portfolios’ turnovers are also modest.
But the similarities stop there, noted Caquineau.
“Capital Group New World follows a very different approach than most funds in the category. The team believes that while developing countries are growing faster than developed markets, emerging market firms aren’t necessarily the best way to capitalise on that growth,” he said.
As the managers believe developed market multinationals may be better positioned, the fund targets all firms that generate at least 20% of their revenues or assets from the developing world.
“The team believes that while developing countries are growing faster than developed markets, emerging market firms aren’t necessarily the best way to capitalise on that growth.”
Mathieu Caquineau, morningstar
Therefore, its top holdings include international companies such as Microsoft and LVMH, while keeping exposure to typical emerging market firms such as TSMC and AIA.
According to the fund factsheet, around 40% of the Capital Group fund’s AUM is allocated to emerging markets, while more than a quarter is allocated to North America and another 20% to Europe.
Meanwhile, the T Rowe Price fund invests only in companies in emerging markets.
For instance, 37% of its AUM is invested in China, followed by 15.1% in India, 9.6% in Taiwan and 7.2% in Korea.
Fund characteristics
Sector allocation:
| Capital Group | T Rowe Price | ||
| Financials | 14.2% | Financials | 22.8% |
| Information Technology | 14.2% | Information Technology | 20.3% |
| Health Care | 13.2% | Consumer Discretionary | 18.2% |
| Consumer Discretionary | 11.0% | Consumer Staples | 14.2% |
| Industrials | 10.9% | Communication Services | 7.6% |
| Materials | 8.3% | Industrials & Business Services | 7.0% |
| Consumer Staples | 6.3% | Materials | 3.6% |
| Cash and equivalents | 5.4% | Real Estate | 2.6% |
| Energy | 5.3% | Energy | 1.7% |
| Communiation Services | 5.2% | Utilities | 0.5% |
| Other | 2.5% | Health Care | 0.4% |
| Utilities | 1.8% | ||
| Real Estate | 1.6% |
Top five holdings:
| Capital Group | Weighting | T Rowe Price | Weighting |
| Microsoft | 2.7% | TSMC | 7.8% |
| Novo Nordisk | 2.1% | Tencent Holdings | 6.6% |
| Kotak Mahindra Bank | 2.0% | Samsung Electronices | 4.6% |
| Reliance Industries | 1.9% | Yum China | 4.3% |
| TSMC | 1.8% | Zhongsheng Group | 2.9% |
Performance
There is quite a contrast in performance when looking at the three-year cumulative returns of the two funds.
The Capital Group fund generated a 1.64% return over the period, while the T Rowe Price fund lost almost 18% over the last three years.
Although both funds were impacted by market sentiment during the pandemic, the returns for the T Rowe Price fund took a downward turn after the first quarter of 2021 and fell to a low of over -30% in the last quarter of 2022.
Despite having a similar trend, the Capital Group fund has fared better in terms of performance.
“Capital Group New World’s unique approach tends to reduce volatility, helping the strategy deliver superior downside protection in most market downturns in the last 20 years,” said Caquineau.
“However, the presence of multi-nationals can also hold the strategy back when emerging markets outperform like in 2017.”
On the other hand, the T Rowe Price fund adopts a growth style in portfolio construction with a high focus on financials, technology and consumer discretionary.
“Its growth style means that it may lag when value is in favour like in 2022 or when highly cyclical, commodities-related stocks do well,” he added.
Discrete calendar year performance
| Fund/Sector | YTD* | 2022 | 2021 | 2020 | 2019 | 2018 |
| Capital Group | 6.25% | -23.14% | 3.61% | 23.46% | 26.43% | -13.51% |
| T Rowe Price | 7.11% | -21.73% | 0.86% | 14.51% | 19.21% | -15.82% |
| Equity – Emerging Markets | 8.22% | -24.36% | -11.13% | 16.34% | 25.01% | -16.72% |
Manager review
The Capital Group fund is managed by 12 fund managers based in the US, the UK, Hong Kong and Singapore.
They have varying investment approaches and mandates that span different asset classes.
Eleven managers focus on equities and one manages the fund’s fixed income portfolio, though that allocation has dwindled.
They are backed by over 150 analysts across three equity subsidiaries.
Meanwhile, the T Rowe Price fund’s veteran manager Gonzalo Pangaro retired in January 2022 after a 16-month transition in which Eric Moffett and Malik Asif gradually took over as fund managers.
“While Pangaro had built a solid long-term track record in various market conditions with a level of volatility broadly in line with the market, Moffett hasn’t had the time to build a relevant record yet but previously managed an Asian equity fund for eight years with convincing long-term results,” said Caquineau.
The current lead manager, Moffett, has 22 years of experience and has been at the firm for 15 years.
He is backed by a team of 33 analysts and some associate analysts organised by regions and sectors.
Apart from Pangaro’s retirement, the team has also seen a fair amount of turnover in recent years, particularly in Asia among more junior staff.
“While this not a big concern now – the firm has kept investing heavily in resources – the overall team would benefit from increased stability and more effective hiring,” Caquineau added.
Conclusion
Morningstar’s perception of both funds differs significantly. It has awarded the Capital Group product five stars based on historical returns and a forward-looking analyst rating of bronze, but assigns the T Rowe Price fund only two stars with an analyst rating of neutral.
FE fundinfo, which bases its assessment on a fund’s three-year history of delivering alpha, minimising relative volatility and producing consistent returns, awards the Capital Group fund two crowns, but only one crown to the T Rowe Price product.
For investors who are looking for a stable fund, Caquineau believes the Capital Group fund may be a “more proven option” with less key-person risk and proven efficacy under different market environments.
“It will not be a first choice for investors looking for pure emerging markets equity exposure though,” he said.
“T Rowe Price is a solid option, albeit our level of comfort with the team is not as strong as it is with New World.”
