July 2016 fund performance

Weightings to Brazil and China made the difference for emerging markets equity funds in July 2016.

Jeffrey Bunce, CFA 25 August, 2016 | 5:00PM
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Jeffrey Bunce: For Morningstar.ca, I'm Jeffrey Bunce, and this is your July fund performance report.

This month we're discussing emerging market equities. In Canadian dollars, the MSCI Emerging Market Index was up 5.5% in July and up over 11% over the past six months. Over the last half year, we've seen global financial conditions ease a bit. We've seen some weakness in the U.S. dollar as well as commodity prices rebounding. This has created a favorable environment for EM equities. Gains were concentrated mostly in the materials sector, the energy sector and in financials. Also, the Brazilian market has rebounded this year from being the worst last year to one of the best this year.

Active managers on a whole didn't really distinguish themselves from the benchmark over the past one to six months. The Emerging Markets Equity category average roughly equaled the benchmark over one month and slightly exceeded over the past six. However, Brandes Investment Partners and Westwood, two managers that we follow closely in this space, were able to parlay the favorable market environment into good gains over the past one to six months.

Starting with Brandes, this emerging markets equity fund has really excelled lately. Over July, it was up 6%, and over the past six months, it was up over 20%. Outsized gains such as these are typical for the Brandes fund and its deep value philosophy. This strategy is also susceptible to large short-term losses, so investors should be cautious. The fund's success over the past six months, however, has been largely driven by favorable stock selection in a majority of sectors as well as an 18% weight in Brazil, 12% larger than the EM index.

Westwood Emerging Markets didn't do quite as well as the Brandes fund, but it still outperformed the benchmark and peers, rising almost 6% in July and almost 15% over the past six months. Westwood's investment style is more core in nature compared to the Brandes fund and isn't quite as volatile. The manager focuses on companies with higher cash returns on investment, and so the portfolio exhibits higher quality characteristics. Over the past six months, the fund also benefited from an overweight to Brazil, 3% greater than the benchmark. Also, a 10% allocation to China, 13% less than the benchmark, also benefited as Chinese equities struggled. The fund also added value with stock picks in financials and materials.

Over the long term, emerging market equities should provide strong but volatile returns. Indeed, both the Brandes and Westwood funds had a poor year in 2015 but bounced back strongly in 2016. If investors can stomach the volatility, these funds can be a good addition to a total portfolio and provide diversification benefits.

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About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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