Liontrust Emerging Markets Fund

The Liontrust Emerging Markets Fund returned 0.3% over the second quarter, versus the IA Global Emerging Markets sector average and MSCI Emerging Markets Index’s respective gains of 4.6% and 4.9%*.

The second quarter saw global markets and economies continue their steady recovery from the pandemic-induced turmoil of 2020. Emerging markets lagged developed markets by a relatively small margin. Despite the overall recovery trajectory, the quarter was marked by rolling second-wave Covid breakouts, leading to localised differential market performance from month to month. India suffered the most high-profile virus resurgence, seeing new daily cases of 400,000 per day, double the peak during the first wave last year. However for the most part, such outbreaks were generally contained without recourse to the scale of social restrictions seen last year and therefore the majority of markets recorded positive returns. The general tone continued to be one of recovery, with commodity prices rising alongside aggregate inflation expectations. The best performing major markets were Brazil and Russia where an ongoing domestic recovery and rising oil prices respectively drove equities higher, supported by stronger currencies as both Central Banks continued to tighten rates in the face of rising inflation. South East Asia continued to underperform and was the most affected (outside of India) by Covid outbreaks. Despite the second-wave effects felt in India, the market there managed to look through the pandemic headlines and actually performed better than average.

The Liontrust Emerging Markets Fund had something of a frustrating quarter, underperforming the Index. On a market basis, the portfolio was largely well positioned − overweight positions in all three of Brazil, Russia and India, all of which performed well and contributed positively to Fund returns on both an allocation and stock selection basis. However, it was the portfolio’s North Asian exposure that overshadowed these strong performers. In particular, China was the most significant contributor to the Fund’s relative underperformance over the quarter. Although China saw a relatively muted performance over the period, there was a significant dispersion on a sector basis, and our zero exposure to the extremely strongly performing healthcare sector proved costly. Moreover, the exposure the Fund has in the financials sector, predicated on a revival of the domestic credit cycle and appealing valuations, worked against performance. This was further compounded by profit-taking in hitherto strong performing stocks in the consumer sector such as Haier Smart Home and Trip.com, with both being affected by the slower-than expected recovery from 2020’s lower growth profile. 

Elsewhere in Asia, both South Korea and Taiwan counted against the Fund. In South Korea, we saw a further quarter of sluggish performance from key technology holdings Samsung Electronics and Hynix, both of which are significant positions. In Samsung, we see ongoing value amidst a strongly performing memory segment, which also holds promise of improved pricing for Hynix in the second half of the year. However, in the second quarter a renewed market concerns over rising inflation and potential Central Bank tightening saw more cyclical areas − including semi-conductors − underperform. This was also true of industrial automation holdings Hiwin and Airtac in Taiwan, both of which suffered from reduced global growth expectations, as well as a brief but meaningful sell-off in Taiwan relating to a resurgence of the Covid virus. Finally, the Fund’s performance was hurt by Chilean copper miner Antofagasta, which has performed very strongly in the last year, but in the second quarter was impacted by election results that led to fears the lucrative mining sector would be more heavily taxed, as well as being hurt by lower global growth expectations, which led in turn to lower copper prices.

On the positive side the Fund's positions in India continued to perform well − in particular long-term mid-cap holding Finolex Industries saw very strong returns driven by ongoing volume and margin improvements, as well as large-cap banks ICICI and State Bank of India. Materials and financials were also the source of outperformance in the Brazilian market where iron ore producer Vale had a strong quarter backed by ongoing premium pricing for their high-grade product and private lender Itau Bank enjoyed a bounce-back quarter on higher yields and signs of improvement in the credit environment. 

Over the quarter the Fund added positions in Korea (Hankook Tire, furniture-producer Hanssem and internet portal Naver), Taiwan (Realtek Semiconductor) and Hong Kong (power-tool manufacturer Techtronic). The long-held position in Peru’s Credicorp was sold in April following the election results revealing much higher political risk with the ascent of Castillo over Fujimori. Towards the end of the quarter, the Fund participated in the IPO of Krishna Institute of Medical Sciences, a fast-growing, high-margin hospital provider with a focus on Southern India. 

The outlook for emerging markets remains somewhat cloudy at the current juncture − with a complex picture of volatile growth expectations and rapidly evolving perceptions of the Federal Reserve’s reaction function to the recent pick-up in inflation. We have reduced the Fund’s exposure to Chinese financials and increased the weight to India in order to better reflect our positive view of the Indian economy and earnings growth in that market, better insulated as it is from the somewhat deteriorated global growth outlook. These changes, along with a pick-up in technology holdings in both South Korea and Taiwan has seen the Fund get off to a stronger start in the third quarter. 

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

*Source: FE Analytics as at 30.06.21

**Source: FE Analytics as at 30.06.21. Quartile generated on 07.07.21.

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

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