Over the month the fund gained 4.5% and finished the year at an all-time high. This brought the quarterly return to 6.2% and the full year total return to 19.3%.
The fourth quarter distribution of £0.103238 was lower than last year partly due to our Korean companies that moved ex-div dates into the first quarter from the end of December. Our twelve month dividend was therefore 7.45%, beating UK inflation of 3.9% yoy in November.
Over the year we made a positive return in every sector and three quarters of the twenty countries we’ve invested in. This includes a positive return from our China/Hong Kong holdings, a market that started well but ended the year down 18%.*
At the country level the gold medal went to Taiwanese technology, which also produced our best single stock return which is a mid-cap rugged computer manufacturer. The broader top ten featured two companies each from Taiwan, Poland, Mexico and Brazil, one from Greece and one from UAE, which shows a healthy level of diversification.
This is important as we’re interested not just in the absolute performance but the ‘quality’ of the return. We believe that directly or indirectly, the majority of the capital we’ve been allocated comes from individuals saving for retirement. We therefore don’t want our risk, or our returns determined by a few ‘big bets’ but a diversified and sustainable blend of investments. This is reflected in the volatility of returns which last year was around 8.7%, equivalent to the UK Gilt ETF, and is roughly two thirds of the industry standard EM equity benchmark.
Whilst there’s no empirical link, this can also be considered indicative of the drawdown risk more typically associated with emerging markets, and at the bottom of which is where the worst investment decisions tend to be made. So it’s important to try to minimize this risk if at all possible, within the confines of a long-only fund. Despite all the noise last year surrounding corporate defaults in China, US and European bank failures, wars and elections, the largest monthly drawdown period was -1.6%.
Comparing this risk adjusted return to alternative relevant asset classes, we’ve done better than not only emerging market equities and bonds, but broader developed market global benchmarks more typically associated with conservative income orientated strategies.
All of this leads one to conclude, contrary to popular belief, that 2023 was actually a pretty good year for emerging markets. However you just wouldn’t have noticed this if you’d only read the popular press and invested in passive EM funds. We very rarely reference our benchmark as it bears no relevance to our allocation process, but being year-end it’s worth highlighting that it returned just 3.7% in GBP and with higher volatility. The fund therefore outperformed by 15.1% over the year and 20.5% since inception.
When we launched this fund we not only decided to take a somewhat different approach focusing on real yields and total shareholder return, but at the margin we’ve also tried to shift some well-established preconceptions relating to both the opportunities and the risks in emerging market equities. The most obvious being the perceived homogeneity of the asset class with China as the determinant factor. Returns at the country level this year have been quite heterogeneous, which can be used for effective diversification.
All markets have risk, the issue is whether they’re appropriately understood and adequately priced. Our view has been that the perceived risk in the emerging world is high, but it’s attractively priced and in reality risk across the region is declining. This compares to the developed world where risk is obscured, poorly understood and investors are (in our opinion) inadequately compensated. Thankfully the first 18 months of the fund’s history appears to support this view.
*Based on MSCI China in GBP