Fact Check: Aberdeen Emerging Opportunities Fund

Reflecting the struggling performance of many of Aberdeen Standard Investments’ funds over recent years, the manager’s Emerging Opportunities fund has failed to deliver sufficient capital growth to meet the objective set out in its product disclosure statement (PDS).

Capital growth over the medium to long term

The first half of the Emerging Opportunities’ objective is “to provide investors with high capital growth over the medium to long term”, which it specifies as being three to five years.

FE Analytics reveals, however, that it would be a long bow to draw to call the fund’s growth over the last five years as “high”.

On $20,000, which is the minimum investment amount for the fund, invested in Emerging Opportunities five years ago, capital would have grown to just $24,356.47 at this June’s end. Over three years, it would have grown to $23,182.45. And while ten-year growth isn’t specified in the fund’s objective, $20,000 capital still would have only grown to $27,650.87 over the decade to 30 June, this year.

As this was calculated on the income earned off the fund over those periods, it is not adjusted for growth being reinvested in the fund over that period. As it cannot be presumed that all investors are reinvesting capital growth in the fund, though, this is a more reliable measure of how the fund meets this part of its objective overall.

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Looking at the fund’s returns, it’s unsurprising that its capital growth has been low.

Over the last five years it returned 6.22 per cent, lagging 8.02 per cent and 9.69 per cent from the EM equities sector on average and its benchmark, the MSCI EMs Index, respectively. Its three-year returns of 3.99 per cent also fall behind the sector and benchmark, by 3.33 and 4.91 percentage points, respectively.

Its ten-year performance is notably stronger, with its returns of 7.70 per cent outperforming those of both the sector and index.

When asked about the fund’s capital growth, senior investment specialist at Aberdeen Standard Investments, Josh Hall, said that Aberdeen believed the fund had met its objectives over the long term.

He said that since its inception in July 2004, an investment of $10,000 would’ve grown to $38,193.01.

While it’s objectively fair to call that investment length “long-term”, the fund specifies in its PDS that it considers “medium to long term as three to five years”. The fund’s recommended investment period is also “three to five years or more”. It doesn’t stand to reason then, that Aberdeen can rely on 14-year growth to prove this objective.

Hall acknowledged that the three and five-year returns are currently lower that Aberdeen’s longer-term expectations, saying that the weak returns achieved in EM equities over the second quarter of 2018 were a cause. It’s worth noting that both the sector and index returns mentioned above for those time periods rode out that same quarter with stronger results.

Hall also said that EM equities in general can be volatile in the short term. While the above may suggest otherwise for this fund, he said that “in our view investors are generally rewarded for taking on that risk with stronger longer-term returns”.

Exposure to EMs

The second arm of the Emerging Opportunities’ objective aims to achieve capital growth “by seeking exposure to emerging stock markets worldwide or companies with significant activities in EMs”.

According to FE Analytics, the fund has met this objective.

Its  top two holdings are in Indian and Chinese equities, which are obviously two of the largest players in the EM space. Its next eight top holdings are all in companies that have high activity levels in EMs, with China a common theme.

While Samsung, which accounts for 5.88 per cent of the fund’s overall assets, is dominant enough in developed countries that it may not overtly seem like an EM stock, its listing in South Korea means that it is categorised as such.

Indeed, Hall pointed to South Korea’s definition by MSCI as emerging. He also said that “a significant part” of Samsung’s exports are to other EM economies.

Regionally, 63.25 per cent of Emerging Opportunities’ overall assets are in Asia, which is dominated by EMs. Its only other regional holding above 10 per cent, in the Americas with 18.56 per cent of assets, also stacks up  where the fund’s objective is concerned.

But is simply investing in EM stocks or relevant companies is enough to fully satisfy the objective that capital growth is achieved by investing in these assets?

Surely the performance of those stocks must be considered too.  And as the capital growth outlined above shows, the Emerging Opportunities fund has not delivered on this.