Somel (pictured) took over sole-responsibility of the £3.2bn M&G Global Basics fund from the long-serving Graham French, who took the decision to step down in November last year. Though the new manager says he has tweaked the portfolio recently, he will not be changing the fund’s objective of investing in the building blocks of the world’s economy.
One of his current themes, he says, is to find companies and sectors that are making money from the increasingly wealthy emerging market consumer.
“We look for areas of the world where growth is going to be strong,” Somel said. “Over the years, we owned YUM Brands with star franchises.”
“We don’t own them because they have had good positions in Europe or the US, we bought brands like KFC and Pizza Hut because when we met their CEOs they told us that the only place they are investing is in the emerging markets.”
According to Somel, there are now more KFCs in China than in the US and he says they are far more profitable. However, he says that is having a severe impact.
“But let’s look at the consequences of that growth,” Somel said. “What happening, just like in the developed markets, is that health problems are coming to the fore. Individuals are a lot larger and much more obese due to unhealthy lifestyles. Obesity is becoming a very, very big problem.”
As a result, Somel says he has been upping his exposure to the healthcare sector, and in particular, areas which are tackling the increasing problem of diabetes across the developed and emerging world.
“In 1985, 30 million people suffered from type two diabetes. Today, that number is 285 million and growing. It is one of the most prevalent diseases out there and there is no cure,” Somel explained.
The manager says that there are only a few options for those who suffer from type two diabetes. One is insulin, which has proven to the best way to lower blood sugar levels. However, Somel says that insulin also exacerbates weight gain and makes users more drug dependent.
Therefore, instead of going down the drug route, Somel and have been building up a position in Australian healthcare specialist GI Dynamics. He currently owns 15 per cent of the company, making M&G the largest individual shareholder in the business.
“We don’t have any drugs in the portfolio that you have to inject into yourself,” Somel said.
“We have found a company that looks at this issue very, very differently. It’s called GI Dynamics, and they have a product called an Endobarrier. It’s not a drug, it’s a two foot long Gor-tex sleeve which sits in your large intestine.”
“For the one year it sits in your large intestine, it stops the fatty acids and sugars from being excreted into your blood stream.”
He says the Endobarrier causes blood sugar levels to drop just like insulin, but over 12 month period users have the product within their system they, on average, lose 15 to 20 per cent of their body fat.
Somel says the company currently has 75 international patents and 29 pending. He says the NHS is currently trialling the Endobarrier and it is also soon to be approved in the US, Brazil and India.
While Somel is very optimistic on the company, he says the current problem is that although it is generating revenue, it isn’t making a profit as its management are spending the majority of that capital on trials.
He says, however, that it isn’t a cause for concern.
“GI Dynamics has a market cap of $250m and it has no debt,” he said. “While it is spending a lot on trials, they make a $4,000 margin on each one of their products. That means they have to sell 63,000 of them and you effectively make your money back on your investment.”
“Putting that into context, 63,000 in a world where 285 million people suffer from type two diabetes looks like a good growth opportunity.”
Somel joined the M&G Global Basics team in August 2008 and was made deputy manager to Graham French in January 2010.
French had managed the fund for exactly 13 years between November 2000 and November 2013 and, according to FE Analytics, it was the second best performer in the IMA Global sector over that time with returns of 242.49 per cent.
Performance of fund vs sector Nov 2000 to Nov 2013
Source: FE Analytics
However, while it had been a consistent outperformer in the lead-in to and immediate fall out of the financial crash, the fund’s returns have tailed off significantly over recent years.
Our data shows that it was a bottom quartile performer in 2011, 2012 and 2013. Cumulatively, over that time the fund lost 8.69 per cent while the average fund in the sector returned 20.78 per cent.
Source: FE Analytics
While the fund has still underperformed the sector since Somel took over the portfolio in November, it has started 2014 more promisingly and is currently second quartile so far this year.
Somel blames the recent underperformance on the fund’s high indirect weighting to emerging markets and commodity stocks, which have both been massively out of favour due to issues such as the economic slowdown in China.
However Somel, as he recently told FE Trustnet, has been upping his exposure to the metals and mining sector due to ultra-low valuations and a wholesale change in management across the major mining firms.
Currently, basic material stocks make up 23.89 per cent of Somel’s portfolio. He also has a high weighting to the consumer products and industrials sectors.
M&G Global Basics’ clean share class has an ongoing charge figure (OCF) of 0.92 per cent.
