According to Morningstar data, European and UK equity funds saw net outflows of €198bn over the last five years, and GEM equity funds saw net inflows of €39.3bn. The remaining region-specific GEM funds show net outflows of varying degrees. This shows a clear move away from region-specific investing and towards generic GEM funds.Source: Morningstar as at February 2017 and Last Word Media Research as at February 2017 Scroll
Despite the investment pattern shown in the first chart, daily annualised returns over five years for GEM equity funds were just 5.38%, compared with the largest returns over five years from India-focused funds at 11.01% and China-focused funds at 9.93%. This helps show that investor sentiment is not always right.
The chart also shows that one-year (daily) returns for Latin America and Russia-focused funds were greatest at 42.28% and 44.83% respectively while five-year returns for funds focused on these regions were the lowest of those featured (at -2.31% and -0.59% respectively). They demonstrate the biggest shift in the past five years.
There is clear disparity between sentiment and actual returns as demonstrated by the difference in investment and returns shown in the charts above. At Eastspring, we recognise that it is extremely hard to be more informed than the market but that there is considerable behavioural bias in many investor decisions. We therefore hold value positions with high conviction that are often contrary to those of our peers. As such we have designed a very disciplined value approach that focuses on the price of each specific stock relative to our estimate of its sustainable earnings. As such we often have high-conviction positions in stocks unloved by our peer group. This results in a negatively correlated active return.
The disparity between investment and returns as demonstrated above helps show the importance of ensuring your investment manager has a competitive advantage. Ernst Knacke from Quilter Cheviot, Ben Gutteridge from Brewin Dolphin and Tony Lawrence from 7IM discussed the issue at our recent roundtable.
*The research conducted with our partner, Last Word Media, surveyed 81 fund buyers in February 2017. Some 25 were from Singapore, 13 were from Hong Kong, 11 from the UK, 32 from Europe excluding the UK.
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