Investment trust manager Paul Niven is contemplating a return to emerging markets, after allocation to the region cost his vehicle performance this year.
The £3bn Foreign and Colonial Investment Trust’s existing exposure in the region had “not done as well as I would like”, which was due to being underweight in China, the manager said.
“In emerging markets, we have been long India and underweight China, which has had a phenomenal run in the year to the end of June,” he said.
“Our underexposure to the highly performing Chinese equity market has held back relative performance, but I’m not uncomfortable with that because I think China still is highly speculative and we are not chasing that market.”
But an interest rate rise in the US and the UK could be a catalyst for the manager to up his 10.6 per cent weighting to global emerging markets, where he thought there would be a significant rotation.
“Emerging markets have been a tremendous underperformer during the past three or four years and have continued to face a number of headwinds, but are looking cheaper,” he said.
“I have not done anything about it yet but it could be that the rate rises will give us an opportunity to recommit to emerging markets in terms of allocating capital from the US market.”
Mr Niven took over the trust a year ago from Jeremy Tigue, who had been at the helm for 17 years.
Since then he has reduced its holdings, which consist of both stocks and investments in other funds, from more than 600 to just below 500.
This has coincided with a heavier weighting to Europe, which currently makes up 22.1 per cent of the portfolio.
He thought the region would outperform the US at this stage in the cycle, buoyed by accommodating monetary policy from the European Central Bank.
“We made a quite significant change in the latter part of last year as part of this theme of expecting leadership of global markets to move away from the US to other areas that have lagged, including Europe and Japan,” he said.
“The US has outperformed Europe since 2009 and my outlook is that Europe will now outperform on a relative basis.”
Mr Niven’s tenure has coincided with a performance uptick and between July 1-21 2014 the vehicle returned 20.1 per cent, compared with the 13 per cent rise in the FTSE All-World index and the 13.4 per cent average return in the AIC Global sector.
In the three years prior to that, the trust returned 26 per cent, in line with the 26.5 per cent increase seen by the index and narrowly beating the 22.6 per cent average return for the sector.
