Allianz Emerging Markets Equity increases diversification

Kate Marshall | Wed 10 May 2017

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• Fund’s flexibility to invest across the emerging markets has increased over the past year
• Exposure to South Korea and Taiwan has increased at the expense of Brazil, India and Russia
• We view the increased flexibility afforded to the manager positively, although we will continue to monitor performance

Our view

The Allianz Emerging Markets Equity Fund's investment universe has broadened significantly over the past year. Kunal Ghosh, the fund's manager, is now able to invest across the broad spectrum of emerging markets as he sees fit. We view the increased flexibility afforded to him positively. We prefer managers to adopt an unconstrained approach in order to achieve their objectives and believe it presents greater opportunity to deliver better long-term returns.

The fund has marginally underperformed the broader emerging markets since the changes were implemented one year ago, although this is over a very short timeframe. Kunal Ghosh and his team’s longer-term track record is not as strong as other managers in this sector, although please remember past performance is not a guide to future returns. We would like to see evidence of the team’s ability to add value through stock picking over a prolonged period before we consider the fund for the Wealth 150 list of our favourite funds across the major sectors.

Past performance is not a guide to the future. Source: Lipper IM to 28/04/2017

How has the fund changed?

A year has passed since the fund increased its flexibility to invest across the broader spectrum of higher-risk emerging markets. Previously the fund invested predominantly in Brazil, Russia, India and China (BRICs), but the relationship these four countries share with the rest of the world has evolved over time. The manager believes there are an increasing number of investment opportunities in other fast-growing emerging economies.

The fund’s diversification across both sectors and countries has therefore increased. The BRIC countries are weighted heavily towards certain industries, such as energy, in which the fund previously had a greater allocation. Kunal Ghosh has since reduced exposure to the energy sector to 13.1%, although this remains a higher weighting than the broader market.

Investments in consumer-related companies, which have proven popular with investors in recent years, have also been reduced. He believes the shares of many of these businesses are less attractively-valued following a period of strong performance, while earnings growth is also stronger in other areas.

Exposure to each of the BRIC countries has also naturally reduced, given the manager’s flexibility to invest in other areas of the market. India, for example, now comprises only 5.3% of the portfolio. Kunal Ghosh believes the country will eventually reap the benefits of Prime Minister Narendra Modi’s sweeping economic reforms. This could take time, however, and he believes India’s transition to a modern-day economy could prove painful in the shorter term.

Exposure to South Korea and Taiwan has increased to 20.4% and 16.9% of the portfolio, respectively. Taiwan Semiconductor Manufacturing, which manufactures components for mobile phones and computers, is currently the fund’s largest investment. Its customers include Apple, one of the world’s largest technology companies, and Kunal Ghosh believes the valuation of the business is attractive in comparison with its earnings and future growth potential.

Outlook

Kunal Ghosh is increasingly confident in his outlook for emerging stock markets. A combination of stronger growth and return on equity (a measure of a company’s profitability) could see investor sentiment towards the region improve and share prices rise further.

The manager continues to focus on investing in quality companies that he believes will provide the wider fund with some resilience during weaker periods for the market. The increased diversification across countries and sectors could also reduce the volatility of the portfolio, although there are no guarantees.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.