With a loss of approximately 1 percent in euros during the fourth quarter, emerging markets ended 2024 on a slightly negative note. Although the year delivered a return of 14 percent, the emerging markets index lagged behind the global index, which achieved a return of 25 percent.
China, a heavyweight in the emerging markets index (the Morningstar EM TME Index), was one of the best-performing equity markets in 2024, delivering a return of just over 25 percent. This performance was largely driven by a very strong third quarter, which the country was unable to sustain in the fourth quarter, when the Morningstar China TME Index posted a loss of 1.7 percent.
On the other hand, South Korea stood out with a full-year loss of over 18 percent. Similarly, Latin American countries such as Brazil and Mexico were among the weakest-performing markets of 2024, recording losses exceeding 20 percent. In contrast, these countries had been among the best performers in 2023.
Against this backdrop, Morningstar analysts provide a qualitative assessment of two funds in the Morningstar Emerging Market Equities category: Capital Group New World and Fidelity Emerging Markets.
People
Both Capital Group New World and Fidelity Emerging Markets are supported by management teams distinguished by their experience and robust analyst support. Capital Group stands out slightly more in these areas, earning a High rating for the People Pillar, while Fidelity receives an Above Average rating.
Capital Group New World is led by the experienced Bradford Freer, who oversees a team of twelve managers. Each manager is responsible for a portion of the fund and operates within one of Capital Group’s three subsidiaries. Freer allocates the fund’s capital across the managers and ensures their investment styles complement each other.
The Fidelity Emerging Markets fund, under the leadership of the seasoned Nick Price, is supported by a co-manager and two regional managers.
Both teams benefit from substantial analyst resources. Capital Group managers have access to more than 200 analysts globally. While the Fidelity team has fewer resources, it is still supported by a formidable team of nearly 50 analysts.
Process
Both Capital Group and Fidelity employ processes based on rigorous fundamental equity research, though they differ in focus and implementation. Capital Group has an Above Average Process Pillar rating, while Fidelity is rated High.
At Capital Group, the twelve managers independently manage portions of the portfolio, each following their own investment philosophy. The common thread is their focus on benefiting from emerging market growth, particularly as reflected in corporate revenue growth. To mitigate the risks associated with investing in emerging markets, managers have the flexibility to invest in Western companies that derive a significant portion of their revenues from emerging markets. Additionally, a small portion of the portfolio is allocated to emerging market debt, though this has declined to less than 5 percent in recent years.
Fidelity’s process involves a rigorous three-stage analysis before stocks are included in the portfolio. The approach targets quality companies characterized by high returns on capital and low reliance on external financing. Analysts present their best ideas to regional managers, who then filter these ideas before further review by Price and his co-manager.
Portfolio
The portfolios of the two funds exhibit significant similarities in style and market capitalization exposure. Both have a stronger growth orientation than the Morningstar EM TME category index and are primarily invested in large-cap stocks, with mid- and small-caps accounting for less than 10 percent of the portfolios.
However, there are notable differences in other characteristics. Capital Group New World features much greater diversification than Fidelity Emerging Markets. Capital Group’s portfolio reflects the sum of twelve individual portfolios, resulting in as many as 370 holdings and a concentration of only 19.5 percent in its top 10 positions. Fidelity, by contrast, holds slightly more than 100 positions, with a top-10 concentration of 43.6 percent.
This diversification extends to sector allocations. Capital Group’s sector weightings are relatively aligned with the category benchmark, while Fidelity is much more concentrated. The consumer discretionary, financials, and technology sectors account for nearly three-quarters of Fidelity’s portfolio.
In terms of geographic allocation, Capital Group’s flexibility to invest in developed markets makes the United States the fund’s largest country allocation, with Europe also holding a significant weight. This comes at the expense of exposure to Asia. Fidelity, in contrast, has a heavier allocation to Asia, with India as its largest country holding and South Africa also standing out for its relatively high weight.
Performance
The differences in portfolio positioning are also reflected in the performance of the two funds. Capital Group has significantly outperformed Fidelity in recent years. This outperformance is largely attributed to the fund’s exposure to the United States and, to a lesser extent, Europe, as these markets have outperformed emerging markets for an extended period.
The disparity in stock selection is also evident in performance. Stocks such as Microsoft, NVIDIA, Eli Lilly, Broadcom, and Novo Nordisk have been among the top contributors to Capital Group’s performance compared to Fidelity over the past five years.
Ronald van Genderen, Senior Manager Research Analyst at Morningstar, highlights that Morningstar evaluates and rates funds based on quantitative and qualitative research. Morningstar is part of the expert panel of Investment Officer.