Liontrust Emerging Markets Fund

The Liontrust Emerging Markets Fund returned -2.4% over the first quarter, versus the IA Global Emerging Markets sector average and MSCI Emerging Markets Index’s respective gains of 1.8% and 1.3%*.

Markets began the new year much like they ended the previous one – with strong upward momentum and resurgent risk appetite reflecting renewed confidence that the worst of the unprecedented pandemic of 2020 was over and continued re-opening of the global economy would herald rapidly improving economic data. Emerging markets rose 12% (USD terms) in short order, strongly outperforming developed markets. However, in due course, the powerful recovery led to rising bond yields and a US dollar, as markets anticipated rising inflation and the inevitable response of higher interest rates. Therefore, for much of the quarter emerging markets were caught in this balancing act between a favourable growth backdrop and concerns over tighter global monetary policy. Therefore, despite leading developed markets earlier in the quarter, emerging markets ended the period with a return of 2.0% against the MSCI World Index return of 4.5%.

Within emerging markets, returns were dramatically varied, both on a sector and country level. The prime beneficiaries of the prevailing macro backdrop – cyclical recovery coupled with rising rates – were materials, financials, energy and industrials among sectors, and Taiwan (+10.9%), India (4.9%) and Russia (+4.8%) among countries. On the other side of the coin, several areas saw losses as the market rotated aggressively – primarily defensive sectors such as consumer staples and healthcare, but also countries such as Turkey (-21.7%) and Brazil (-11.1%). Both of these markets suffered from significantly weaker currencies, in part due to the rising US Dollar, but also due to idiosyncratic reasons. Turkey was roiled by political considerations as the Central Bank governor was removed after moving to stabilise the market by tightening monetary policy. In Brazil, the ongoing mismanagement of the Covid crisis has seen decreased confidence in the government to navigate out of the pandemic conditions successfully.

The primary reason for the underperformance of the Fund was the overweight allocation to Brazilian stocks, that not only lagged the ongoing recovery in emerging markets but also were hit by the notable fall in the Brazilian Real. Holdings in Itau Bank and Banco do Brasil – private and public lenders respectively – were particularly weak following on from a powerful recovery in the previous quarter. Elsewhere, the recovery in Russian stocks aided the Fund, with the recovery in hydrocarbon prices supporting private gas producer Novatek in particular, whilst the ongoing economic recovery provided a positive backdrop for Sberbank. The Fund also benefited from rising copper prices through a key holding in Chilean miner Antofagasta, which rallied strongly in the quarter alongside the underlying commodity.

Over the quarter, a number of new stock additions were made in order to diversify the portfolio. In Taiwan, positions were initiated in chip-producer Mediatek and electronic manufacturer Hon Hai Precision. Korean cosmetic and toiletries producer AmorePacific was a further addition, where a turnaround is underway driven by recovering online sales channels. India saw an extremely positive new fiscal framework in the annual budget announcement, marking a new period of fiscal stimulus after several years of tight purse strings – as a result, two stocks in the financial sector were added: mortgage provider HDFC and public-sector lender State Bank of India. In the materials sector, the exposure to the attractive platinum group metals sector was switched from Norilsk Nickel to Sibanye Stillwater due to ongoing operational issues at the former. These positions were funded with sales in Brazilian rail transporter Rumo, as well as a reduction in positions sizes in Brazilian holdings in the financials sector, as well as Chinese stocks Alibaba, China Resources Beer and Kingdee International.

The outlook for emerging markets remains in the balance short term, with competing pressures of the ongoing global recovery, Covid ebbs and flows, and rising yields creating a degree of volatility. We remain focussed on identifying Emerging Leader companies that are best placed to navigate these currents, in both the short as well as the medium-to-long term.

Discrete years' performance (%)**, to previous quarter-end:

*Source: FE Analytics as at 31.03.21

**Source: FE Analytics as at 31.03.21. Quartile generated on 13.04.21.

KEY RISKS

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

DISCLAIMER

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.