(Update) Devan Kaloo, manager of the £2.7 billion Aberdeen Emerging Markets fund, admitted he has been in ‘all the wrong countries and all the wrong sectors’ in the past year as the fund, which is soft closed, suffered fourth quartile performance.
‘Bluntly, we have been in all the wrong countries and all the wrong sectors,’ he said.
Nonetheless the fund manager is positive on the emerging markets over the long term, which he says are experiencing a 'natural, healthy adjustment'. This has resulted in emerging market stocks trading at more attractive multiples than their developed market peers.
'Today we have got companies with long term prospects that are significantly cheaper than their counterparts,' he said.
'In the short term there are going to be concerns about tapering and the China slowdown, but we see the beginning of adjustments that make us confident for the long run,' he added.
The fund, which soft closed in April last year, has seen outflows of around £600 millon in the last 12 months, which combined with market movements, have seen the fund shrink by £1 billion.
As of December 2013, the fund was fourth quartile over one year, ranking 47th out of 52 funds in the IMA Global Emerging Markets sector, with a fall of 9.6% compared with a sector average fall of 4.1%, although it is top quartile over three and five years.
‘We are in a situation where our companies have sold off and the question is, do we change and mitigate macro concerns because the Chinese market has less risks than Brazil? The answer is no, we buy more of our companies because they have now gotten cheaper.’
The manager hopes investors will persevere with the fund in spite of its difficult year.
‘How long are investors willing to put up with underperformance? That is a question for our investors, but I would like to think they understand what we do and our comfortable with our performance for the long term and stick with us.’
The manager said Aberdeen had suffered because of its long term, bottom up style, as ‘all people are concerned about at the moment is what China does and what the US does’.
‘We are a bottom-up stock picking house and we think that is very rewarding because ultimately markets are about companies,’ he said.
‘But in the short-term, markets can forget about companies and that is the period we are going through at the moment.’
The manager argues there is a 'disconnect' whereby the best companies were operating in the toughest macro conditions and vice versa.
‘In this environment people are making snap judgements about good countries versus bad countries, not good companies versus bad companies, so there is a disconnect’
However, he remains upbeat about the long-term emerging market growth story. Although companies in emerging markets have been hit by a double whammy of low growth and rising input costs, which have reduced their profitability, Kaloo said they now trade at a significant discount to their developed peers and are applying self-help methods.
'Encouragingly the recent difficulties faced by emerging market companies will refocus the attention of management on margins and removing excess costs,' he said. 'Consequently, once the cyclical slowdown turns into an upturn, companies should report stronger topline growth as well as widening margins which will drive a strong earnings recovery.'
Within emerging markets, the manager is positive on Thailand where he says the economy is 'in quite a good shape' despite political volatility. He also expects that Brazil could surprise on the upside - depending on the results of its election.