Shake up among emerging market funds predicted in UK

Managers of UK based emerging market funds will face stiff competition from early 2010 when offshore-domiciled funds are included in the UK's Investment Management Association (IMA) sectors, say two leading fund management groups.

An analysis of Lipper data by HSBC Global Asset Management and Baring Asset Management shows that in each of the main emerging market categories (China, India, Latin America, and global emerging markets), the top three performing funds over the past year have been based in either Luxembourg or Dublin, rather than the UK.

This outperformance trend is also clear when analysing three-year performance statistics. Over this 36 month period, the top performing funds in the China, India and Latin America sectors were offshore funds. The exception was the broader emerging markets sector, where the top performing fund was domiciled in the UK. (All data to 30 October 2009, GBP, source Lipper.)

Despite this outperformance of offshore emerging markets funds, UK investors have still invested almost £1 billion into UK domiciled emerging market funds (including single country funds) so far this year, according to figures provided by Lipper Feri (to end of third quarter, 2009).

Rod Aldridge, Head of UK Retail Distribution at Baring Asset Management, said: "Until now, UK based funds investing in emerging markets have been the only funds visible to intermediaries on the popular databases and in industry performance tables. We welcome the progressive action taken by the IMA to make offshore-domiciled funds eligible for inclusion in their sectors."

David Chellew, Head of Market Position at HSBC Global Asset Management, said: "This change could see the emerging markets peer group expand significantly, introducing a whole new range of leading funds and managers. This increased visibility of offshore funds will level the playing field."

Although the IMA inclusion of offshore funds will expand choice for intermediaries, the groups also called for the major platforms to become more accommodating toward funds based outside of the UK.

Chellew added:  "The platforms have traditionally resisted including offshore funds, mostly citing administrative difficulties. Although some have made progress, now it is time that other platforms faced this challenge and embraced the concept of making the best possible funds, irrespective of where they are domiciled, available to UK intermediaries. Otherwise, we could end up in a position where the best funds in some sectors will be clearly visible to the UK investor and advisers, but frustratingly for them, won't be available for advisers to recommend."

Furthermore, intermediaries are likely to see the number of funds available in some sectors increase substantially.  Of funds with a track record of one year or more, there are approximately five times as many offshore funds as UK domiciled funds. For example, there are 31 UK domiciled funds in the UK Global Emerging Markets sector compared with 166 funds in the same peer group offshore.  Within each of the India, China and Latin America sectors, there are less than five UK domiciled funds but more than 35 offshore funds under each category.

Aldridge said: "Even if only a quarter of these offshore funds are registered for inclusion in the IMA Emerging Markets sector, this would double the number of funds for UK advisers to consider."

For managers of Luxembourg or Dublin domiciled funds to be included in the IMA sector classifications from 1 January 2010, the funds must have been submitted to the IMA by 13th November 2009. The two groups predict that the majority of offshore funds registered will be those with an emerging markets theme. This is because emerging markets tend to have international demand from investors which makes an offshore structure preferable for many large providers over a UK based GEM fund.

Baring Asset Management registered nine funds of which seven are emerging market themed. HSBC Global Asset Management registered 11 funds for inclusion in the IMA sector, of which nine are emerging market focused.