The fickleness of US president Donald Trump means emerging market equities are "not worth the risk" despite the cheaper share prices, Simon Edelsten, who runs the £106m Artemis Global Select fund, has said.
The fund has returned 93 per cent over the five years to 12 September, compared with 63 per cent for the average fund in the IA Global sector in the same time period.
Emerging market assets tend to perform poorly when the US dollar is rising in value. This is because the dollar will typically be rising as US interest rates are going up, with the US economy performing well.
This has a negative effect on emerging markets for two reasons. The first is that many emerging market companies and countries have to borrow in dollars, rather than their own currencies, so a higher dollar increases repayment costs, leaving less cash for shareholders.
Because all commodities are priced in dollars, a rising dollar makes the oil and metals exported by emerging market economies more expensive, so less of those is sold, denting the revenues of emerging market countries.
What's more, if the dollar is rising in value because US interest rates are rising, which is the case right now, then the yield on US government bonds goes up, so investors can choose to buy those bonds, which are lower risk, and sell the higher risk assets in emerging markets.
Mr Edelsten said: "Emerging markets tend to have a tricky time during a period of rising US interest rates, which is why we lightened our exposure a couple of year ago.
"We did not expect the Trump trade threats and these make a difficult situation worse. As investors, we may be confident we can spot a good investment, but if it is listed on an emerging market stock exchange, whose leader then annoys the US President, you lose 25 per cent of your money on the falling currency.
"It’s just not worth the risk, especially while large US companies are growing steadily and profitably. So I am steering clear emerging markets for a while to come."
Anthony Rayner, who jointly manages £960m of assets across four multi-asset funds at Miton, also has reservations about investing in emerging markets.
He said: "Asset classes are starting to behave in different ways as we move into a new stage of the risk cycle. Up until April, the S&P 500 Index and the MSCI Emerging Markets Index were moving broadly in tandem, both responding positively to a generally risk-on environment, even with similar down moves in the market shakeout in February.
"However, since April, their relationship has broken down. US equities have since hit new highs and emerging markets have continued to move lower."
He said as economic growth prospects become less certain and political risks grow, the market is moving into a phase where only the most robust economies will thrive.
He said in this "survival of the fittest" environment, he has reduced his emerging market exposure "significantly" and added to US equities, particularly the US consumer. "We also continue to stress-test our portfolios to try to ensure that we’re not too exposed to political risk," he added.
