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Number Cruncher

A sea of red ink for emerging market funds Add to ...

What are we looking for?

Leaders and laggards among emerging markets equity funds this year.

Stock markets have been hammered amid euro-zone debt woes and slower growth, but equities in the developing world tend to take it on the chin harder in downturns.

The screen

We ranked the eight best and eight worst performers among the red-stained funds this year to Oct. 20. U.S. dollar, segregated and duplicate versions of the funds were excluded.

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What did we find?

A dividend-focused fund bleeding less than its peers.

Redwood Emerging Markets Dividend led the pack, shedding only 8.8 per cent. Its peers posted double-digit losses, including iShares MSCI Emerging Markets exchange-traded fund (ETF), which was down 17.9 per cent.

The Redwood fund, which is nearly a year old, is a rarity among its peers, which tend to be marketed for high growth potential as opposed to a focus on quality companies paying dividends. It will own up to 40 names, and typically avoids energy and materials stocks.

The fund has outperformed its peers this year largely because of stock selection – all companies pay dividends, which add to returns. It also got help from shifting into a high cash position by summer, says its lead manager, Edward Lam, of London-based Somerset Capital Management LLP.

The fund has outperformed its peers this year largely because of stock selection – all companies pay dividends, which add to returns. It also got help from shifting into a high cash position by summer, says its lead manager Edward Lam of London-based Somerset Capital Management LLP.

The cash peaked at 40 per cent of the fund in July on concerns about slower growth in Brazil and China. “We were nervous about the markets,” Mr. Lam said. “We thought the credit cycle was ending.… When interest rates or policy rates start reaching their peak, then growth is highly constrained – if not in a contractionary phase.”

Brazil has started to lower interest rates, which is a “relatively negative signal” because it means the price of money is too high, while the non-performing loans of its banks have also started to rise, he said. The slowing of China’s gross domestic product to 9.1 per cent in the third quarter was a “minor disappointment, but we are more interested in the declining steel prices,” he said. “To me, that is a more significant indicator of the underlying weakness in the Chinese economy.”

He has now reduced cash to 33 per cent as he hunts for bargains. He is nibbling away at stocks in Turkey, which has devalued its currency. “Everything is 30-per-cent cheaper than we could have bought six or eight months ago,” he said.

Names in his fund that have held up better than others include Shoprite, a South African retailer that is expanding to others parts of Africa; Taiwanese-based E Ink Holdings, which makes electronic paper for Amazon.com Inc.’s Kindle, and China Mobile, the world’s biggest mobile operator by subscribers.

Mackenzie Cundill Emerging Markets Value, which has little cash, suffered the most with a 26.1-per-cent loss. It focuses on smaller companies, which tend to get hit sharply in market declines. In 2008, this fund, which is run by manager James Morton, lost nearly 65 per cent before rebounding 48 per cent in 2009 and 39 per cent in 2010.

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