Brandes Emerging Markets Equity Fund

Analysis: For the past several years, the AGF Emerging Markets Fund had been the category leader, with a risk adjusted return profile that was head and shoulders above the rest. That all changed last year when their manager, Patricia Perez-Coutts resigned, taking her team with her to a competitor.

After that, we began looking at other emerging markets funds, and one that stood out was the Brandes Emerging Markets Fund. It is managed using a value driven process that looks for companies that are out of favour with investors and whose share price has been beaten down by the markets. It is built on a stock by stock basis which results in a portfolio that has country and sector exposures that look nothing like that of the benchmark. There are various restrictions in place to ensure that the fund does not take on too much risk by becoming too concentrated in any one sector or country.

It is managed by an investment committee using a longer term investment horizon. This patience is reflected in the fund’s lower than average portfolio turnover. It is well diversified holding just under 70 names with the top ten making up just over 30% of the fund. They do not hedge the currency exposure.

Performance on a relative basis has been very strong, particularly over the long term, handily outpacing both the index and peer group. For the five years ending December 31, the fund gained an annualized 2.4% per year, compared with a loss of 0.7% for the index.

Shorter term numbers have been stronger on an absolute basis, but have lagged the index. Much of the recent underperformance can be attributed to its holdings in Brazil’s Eletrobras, which lost nearly 50% in value on a surprise rate cut announcement. They have reevaluated their position and still believe it is undervalued, even with the lower revenue forecast. In fact, they remain committed to all of the names currently in the portfolio and have used the selloff in a number of their favourites as an opportunity to add to them.

Costs are on the high side with an MER of 2.70%. We should point out that this is still below the category average. The volatility of the fund is comparable to other emerging markets funds.

All in, we believe that this is a good option for investors seeking emerging market exposure. However, it is a volatile fund in a volatile sector and investors must be comfortable with this before making any investment in the fund.