Fund Investing

Trimark Emerging Markets' low-turnover approach has performed well, but the price is steep.
By Shehryar Khan, CFA | 10/07/18

Jeff Feng, lead manager of Trimark Emerging Markets, is adept at navigating the risks of this volatile asset class. His high-quality, low-turnover approach tends to do better than most in equity market sell-offs, which, despite a higher price tag, makes this fund an option worth considering for investors seeking dedicated emerging markets exposure in their portfolios.

About the Author
Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group. Before joining Morningstar in 2014, Khan worked for Segal Rogerscasey Canada for three years as an analyst and then associate. He was part of a team responsible for Canadian fund manager research and investment consulting. Khan holds a bachelor’s of commerce degree in finance from Concordia University in Montreal. He also holds the Chartered Financial Analyst® designation.

Feng, who has 20 years of industry experience, stresses on-the-ground research, which is why he relocated to Hong Kong to be closer to the emerging Asian countries such as China, South Korea and Taiwan that make up more than 40% of the portfolio. Two Canada-based analysts, including one covering Latin America, and Invesco's other investment teams support Feng, who also works with analysts in Hong Kong.

He and the team employ a bottom-up approach to identify high-quality businesses with sustainable competitive advantages and seeks to buy them at reasonable valuations. Feng defines quality as stocks with strong organic growth, free cash flows and returns on invested capital; and capable management teams that are aligned with investors. Feng usually seeks a 30% discount to a stock's intrinsic value before buying, but he won't compromise quality for cheap valuations and will pay up for what he feels are truly exceptional businesses.

The fund holds between 50 and 70 names, and given that the MSCI Emerging Markets Index holds more than 800, this results in a differentiated portfolio. Feng is patient and more likely to manage existing holdings as valuations change, rather than buy or sell outright. This keeps average turnover in a range of 20% to 30%. His broad take on quality and his demand that a company's strengths be lasting means the fund can own names for the long term and ride out problems in the interim. Feng, for instance, has found exceptions among Russian, Brazilian and Chinese stocks, which aren't typically known for their quality. Just under half the names he owns have been in the fund since he took charge five years ago.

One of the strengths of the fund's risk management process is a matrix that captures the portfolio's revenue by country and by industry, ensuring the team is aware of any potential unintended industry or country bets they may be taking. For example, while top-10 holding Samsung derives revenue globally, including across large portions of the developed world, other holdings like Russian retailer Magnit and Nigerian Breweries serve more local or regional markets.

Overall, in the five years through May 2018 that Feng has been managing the fund, he's parlayed his quality-focused approach into an 11.9% annualized return, which tops the MSCI Emerging Markets Index's 9.4% return. It also ranks in the top-5 percentile of funds in the Emerging Markets Equity category during this period. The fund has both, done well during the good times and lost less during the bad times, as indicated by its upmarket capture of 102% and down-market capture of 93%.

The fund charges a management-expense ratio of 2.79% for its commission-based Series A share class, an MER of 1.66% for its D-series targeting do-it-yourself investors, and 1.41% for the fee-based F-series. After factoring in a trading-expense ratio of 0.32%, the A and F share classes rank in the third most expensive quartile of their respective distribution channels. Fewer options exist in the DIY channel but the ones that are on offer are lower in price, meaning this fund looks expensive in that channel. Invesco is absorbing a portion of the operating expenses in this fund and does so at its discretion. The MER may rise if it chooses to stop absorbing costs.

Disclaimer:
The information contained in this article is the proprietary material of Morningstar Associates. Opinions expressed are as of the current date; such opinions are subject to change without notice. The information, data, analyses, and opinions presented therein do not constitute investment advice, are provided solely for informational purposes and therefore do not constitute an offer to buy or sell specific securities mentioned within this document or any other investment options. Past performance does not guarantee future results. Morningstar Associates, its affiliates, officers, directors and employees shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use. Please read our Terms of Use for more detail.

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