As China and other Asian nations strive to become the manufacturing powerhouses of the East and companies flourish, emerging markets are looking very attractive. Russia and Brazil are also both actively seeking to stabilise their economies and have performed well recently. Bringing together all the benefits that these markets can offer while allaying investors fears of volatility is a hard task, but one that Aquico Wen, portfolio manager of the Citi Equity Emerging Markets Fund, aims to achieve.

The fund was rebranded and launched in 2001 and now can be described as a medium-sized fund standing at $266.9m. It is domiciled in Luxembourg and aims to provide long-term growth through investing in equities across a diversified range of emerging markets and industries. The main target is to outperform the MSCI Emerging Markets Free Net Index by 4 per cent annually.

As the fund was only recently incepted performance is hard to evaluate, but so far this year it has produced pleasing returns of 33.08 per cent against the benchmark of 31.34 per cent. Wen is confident that the aim of 4 per cent is well within reach by year end. The fund has a standard deviation of 26 per cent.

Citi does not set a minimum investment for the fund but rather a sum is negotiated with the distributor. The base currency for the fund is US dollars though certain share classes are available in EUR as well. A subscription fee of up to 5 per cent is levied and there is also an annual management fee of up to 2 per cent.

What also stands out when investigating this fund is how rigid the investment philosophy and stock selection process are, which is something comforting to investors wishing to enter in to emerging markets. Breakdown of the fund in the bank’s literature is very easy to get to grips with and the exposure to countries and sectors is clearly outlined. This is something that the bank likes to highlight as it is felt by Citi that this is a good fund for investors to start off in in this asset class.

The team running the fund is also well equipped with three portfolio managers covering specific regions (Asia, Latin America and EMEA). Wen has responsibility for Latin America and manages to travel there around twice a year to make company visits. He is also helped by 18 analysts who are dedicated to emerging markets. The fund itself has two country strategists who aim to try and anticipate changes in country risk.

This forms one of the keys of the investment philosophy employed by Wen, alongside valuation and seeking out surprises which could impact stock prices. Detailed research is carried out on every company selected with the hope of avoiding following the market in buying a stock without fully comprehending company fundamentals.

Wen says: “The market research that we carry out covers a lot of the risk element of the fund. We focus on company valuations and the rating given to them by our analysts, but also look to country assessments of political and economical risk. The fund is also very diversified in terms of the companies in the portfolio which maintains a higher level of security from risk.”

The fund works to a strict Dividend Discount Model which seeks to find a company’s true value based on its growth rates, risk factors and cashflows. Deviations from the fair value formulated indicate to the team under or overvaluation which can then be corrected over a period of time.

The rigid investment process is praised by Kevin Morgan, managing director of IFA EZI UK. “The fund does really well in quantifying risk and this is something of a novel idea which you don’t often see with many funds. The fact that it’s Citi gives comfort, too, as you’re not going to get a bigger firm to manage your assets. It’s obviously a highly thought of fund if S&P have given it an AA fund management rating.”

There are currently 121 holdings in the portfolio spread across sectors and regions, though the fund is overweight in Asia. Wen says: “A few months ago we changed our position and are now aggressively overweight in Asia. We saw that companies were undervalued at the time of the SARS crisis and changed our outlook while maintaining a 1-3 year investment horizon for all stocks. Companies in the region are now more focused on returns and they are cheaper than any other asset class. While valuation levels were stretched in the 1990’s there are now great opportunities to be had.”

Korean companies occupy the biggest percentage of the portfolio at 22.36 per cent while Taiwan is also in favour with 15.11 per cent and a strong position for South Africa at 11.80 per cent is also evident.

Wen explains why Korea holds such a large chunk of the portfolio. “Korea’s technology sector has grown considerable and valuations are extremely attractive. It is currently the lowest cost producer in Asia and we see many companies trading at a discount. Although the country does grab the headlines for political reasons we don’t see a risk of conflict as none of the surrounding countries would like to see this.”
The fund also has several big name firms among its top holdings.

Samsung Electronic accounts for a large 8.2 per cent of the portfolio and South African gold mining firm Anglo American makes up 3 per cent. Although there is now an underweight position to Latin America, Petrol Brasileiros and Telefonos de Mexico also figure in the top ten stocks.
Though the fund has plenty of positives it does receive some criticism, in particular for its fees. Charles Ansdell, industry commentator, says: “It is quite difficult to assess as it has not been around for very long, but at the moment I wouldn’t say it’s a stunner.

The charges are high in comparison to most UK funds and it has quite a defensive portfolio. It could be more aggressive and I wonder if you may be better off going for a tracker fund. That way if you had an exchange traded fund you could track an emerging markets index without having to pay for any management fees and there is also less risk involved.”
Morgan adds: “The fees are high and I think this fund would have to fulfil its objective of outperforming the market by 4 per cent to make it worthwhile and this seems quite brave. I do feel that it’s a problem that you can’t use sterling to enter the fund as there is more of a currency risk there. It doesn’t smack you between the eyes and make you think ‘what a cracker’, but it has done relatively well performance wise and it is very actively managed.”

The foundations are in place for this fund to be a success and Wen believes that this fund will make its targets. “Emerging markets have been extremely positive as an asset class this year and I am confident that we will achieve four per cent above the benchmark by year end. The fund has already shown a high level of consistency in its performance.”