Somerset has just three funds available to UK investors, with the first only launched back in 2008. However Potter (pictured), co-head of F&C’s multimanager range, believes they punch well above their weight.“The quality of analysis in company terms is very high indeed. I’m not saying other groups aren’t good at what they do, but the way the Somerset managers work reminds me very much of Angus Tulloch,” he said.
“The focus for both is on quality companies, using qualitative analysis. They look at things like cash flow, depth to equity, intellectual property and so on. The attention to detail reminds me very much of the early days of Angus.”
Somerset Global Emerging Markets and Emerging Markets Small Cap both focus on growth, while Emerging Markets Dividend Growth has an income focus. The small cap fund has already closed to new money, while Dividend Growth is close to reaching capacity, with just over £2bn being run under the strategy.
Tulloch currently heads up First State’s Asia team, including the £7.3bn Asia Pacific Leaders portfolio, while Jonathan Asante leads the emerging markets team.
Potter says one of the few differences between First State and Somerset is the latter’s greater willingness to close its funds to new money, which he sees as a major advantage.
“Their funds won’t get as big as First State and they don’t want them to. They’re already talking about Somerset Emerging Market Dividend fund reaching capacity,” said Potter.
“I was one of the first backers of Angus Tulloch back in 1990 when his Asia Pac fund was just £18m in size. You won’t hear me say a bad word about him because he’s an outstanding manager, but First State is running close to £50bn now.”
“[Jonathan Asante] is an excellent team motivator but as I’ve always said, no matter how good the captain is, a bigger ship is much harder to slow down and turn around.”
Potter has spoken on a number of occasions about his wariness of large funds.
He has great admiration for the likes of Neil Woodford, Richard Woolnough and of course Tulloch, but says he would rather find “managers of tomorrow” which have much more flexibility to add value.
Potter sold out of Somerset Emerging Markets Dividend Growth recently, though points out this was a result of him cutting down his emerging market exposure rather than any poor reflection on Ed Lam (pictured) and his team.
The manager says he may add to his emerging market exposure in the coming months, hinting that a growth focused fund may be on his radar.“It might just be that as the world exits what has been a credit phase, that growth becomes the place to be,” he said.
“We had 14 per cent in emerging markets which came down to 2 per cent. That’s back up to 3 per cent but if it goes to 5 per cent, it could be that it’s a growth fund that comes in.”
The Somerset Emerging Markets Dividend Growth fund has been the standout performer in the range in recent years, delivering top quartile returns over three years and since its launch in November 2010.
Somerset Emerging Markets Small Cap has also consistently beaten its sector and the MSCI EM index since inception, though Somerset Global Emerging Markets has performed more in line with its peers.
Performance of funds, sector and index since Nov 2010
Source: FE Analytics
All of the funds have been consistently less volatile than the sector and index – even the small cap focused portfolio.
Potter says the team’s diligent bottom-up process and focus on quality and corporate governance explains this, making the range an attractive choice for investors looking to dip their toe back into emerging markets after a difficult few years.
The five-crown rated Emerging Markets Dividend Growth fund has a sizeable weighting to cash at 10 per cent, reflecting Lam’s wariness over valuations and dedication to protecting on the downside.
He currently has around half of his portfolio is Asia, 20 per cent in emerging Europe and the rest split between South America and South Africa.
As a point of reference, the First State Global Emerging Markets Leaders fund has beaten its Somerset rival over one and three years, with a similar level of volatility.
Lam’s cash weighting has diluted returns during the rally since February, contributing to this underperformance.
Though Asante and his team invest predominantly for growth, the companies that fit their criteria tend to pay a dividend.
The fund has more exposure to developed markets, which have outperformed over recent years, than the Somerset offering with 14.5 per cent in the UK.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Oliver Crawley, a partner at Somerset, welcomes the comparison with First State. He suggests that the firm could be open to extending its range in the coming years to help cope with capacity, including a venture into specialist Asia Pacific mandates.
“We have slightly more modest capacity targets to First State but I do think there are parallels, in terms of their privately owned structure and their willingness to close funds at lower levels than many of our peers. We admire that,” he said.
“The performance profile is not dissimilar as well. We target lower downside capture and upside participation, as well as a lower volatility.”
While the First State Asia Pacific Leaders fund is still open to new money, the likes of First State Global Emerging Markets Leaders, Greater China Growth and much of the Sustainability range have soft or hard-closed in recent years.
In reference to the launching of an Asia Pacific fund, Crawley added: “It’s something we think and talk about. We have had a number of clients ask us to [launch one], but like any business that’s trying to grow and be around for a long time, we need to be careful not to grow too quickly. We’d have to see, for example, how a launch would impact our existing stock positions, as this could have an influence on overall liquidity.”
“We have an office in Singapore where one portfolio manager operates, so we already have the expertise to run Asia Pacific portfolios. It won’t happen in the next six months, but possible over the next few years.”
Somerset Emerging Markets Dividend Growth is a constituent of the FE Select 100. It has ongoing charges of 1.33 per cent.
The Global Emerging Markets fund is similarly priced, but is set to slash its annual management charge from 1 per cent to 0.75 per cent next month.
