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During much of the 2003-07 bull-run, the £188m Axa Framlington Emerging Markets fund delivered steady excess returns. It ranked in the first or second quartile of the IMA Global Emerging Markets sector for almost any given year over the period.

But the hurricane which hit global capital markets in January took its toll on performance. On 7 August, the fund had fallen 15.1 per cent year-to-date, below the 14.4 per cent losses stacked up by the sector on average.

Meanwhile, the long-term track record remains robust. The fund finished second out of 27 funds in the retail sector for the three years to 4 August.

Fund manager William Calvert says he was ill positioned for the down-turn. “We haven’t been defensive from a sector point of view. We were underweight consumer staples and utilities – things which have held up fairly well. And we’ve had big overweights in industrials, financials and property.”

This problem was compounded by a philosophical bias towards the less-efficient universe of small and mid-cap stocks. “That tends to be where you find the best growth-valuation trade off,” he says,“but we have to be very conscious that in certain market environments, that is an incorrect strategy.”

Q3 of 2006 was one such environment. Having grown roughly 25 per cent in the first five months of the year, the market suddenly dropped 25 per cent in June. The index crept back up over the third quarter – but led by the more liquid, large-cap stocks which Mr Calvert prefers to avoid.

“We gave back what outperformance we’d generated earlier in the year because of our overweight in small caps,” he remembers.

He suspects emerging markets will stage a similar recovery towards the end of 2008, and has therefore positioned the portfolio towards larger capitalisations than he would like. “We’ve got way less in small cap than we did in 2006. You try to learn from your errors,” he says.

However, he has no plans to adjust the sector weightings which so hurt performance throughout the year. “If I’d been clever enough to change them six months ago," he says, "that would have been great, but I’m certainly not going to change them now. Emerging markets are going to come out of the downturn in good shape. The biggest single advantage emerging markets have over the rest of the world is that there’s been no credit crunch. Growth will remain robust. China is not going to collapse like a pack of cards.”

Similarly, he hopes the strength of the energy sector – at 900 basis points, his single largest underweight – will continue to decline with the oil price. “Having a big underweight in energy at the start of the year wasn’t smart. But we stuck with it, and fortunately the oil price has rolled over now,” he says.

Mr Calvert shuns oil companies because their growth is largely driven by exports to the developed world. “The biggest consumer of oil remains the American motorist,” he says, drawing a contrast with steel. “For most metals it’s the emerging markets which dominate. One of the big themes is the infrastructure build-out. That’s not going to be knocked back by the current downturn. So we see the pricing story in steel and coal as being better than oil.”

Mr Calvert’s preference for companies driven by demand from within the emerging world marks the entire portfolio. He rejects the export companies which have been the backbone of Asian growth in favour of domestic retailers.

“Just because you can produce black and white televisions more cheaply than anyone else does not make you a good business,” he asserts. “It’s very hard to maintain margins in a basic export business if you’ve got rising costs and a currency you expect to rise. Whereas if you’re a retailer and you’ve got domestic sales growth in the high teens, that’s a nice operating environment.”

Mr Calvert is especially enthusiastic about retail markets which have low but rising penetration. Financial services are not widely used in Latin America, for example, because its economies have traditionally suffered from hyper-inflation. Now prices are more or less under control, mortgages are booming.

“Mortgages are 10 per cent of GDP in Mexico and five per cent in Brazil, whereas in the UK they’re 85 per cent. That’s a fantastic story of rising penetration, which can last a number of years,” he says.

Mr Calvert’s approach to stock selection centres on this kind of growth story. But he resists the label “thematic” investing. “We identify areas where we want to be picking stocks,” he says. “Emerging markets are all about growth. We’d rather have average management in a good sector than good management in a rubbish sector.”

Banking and property are good sectors in Brazil, according to Mr Calvert, and agriculture, theoretically, "but we can’t find stocks we’d want to buy at the right valuation,” he adds. In South Africa, meanwhile, he identifies an attractive healthcare sector, which he puts down to the high instance of Aids. “One company we own is Aspen Pharmacare, the biggest producer of antiretroviral drugs in Africa.”

Retailers are enjoying rapid expansion across the developing world, as governments try to clamp down on tax-dodging street hawkers. Mr Calvert cites Lojas Renner, the Brazilian clothing chain, as an example. “Unfortunately, everyone knows this and it’s got very expensive,” he says.

Valuation is growth’s shadow in Mr Calvert’s philosophy. He is quick to sell when he thinks valuations are excessive. For example, he says the decision to whittle down the fund’s exposure to China in October last year was one of the main sources of outperformance in 2007.

But despite these small victories, and the excellent long-term track record to which they contribute, Mr Calvert modestly highlights the downside; “With the benefit of hindsight I wish we’d reduced our exposure more.”