With emerging markets continuing to outperform in 2017, FE Alpha Manager Gary Greenberg says that maintaining his Hermes Global Emerging Markets fund’s significant overweights to technology, consumer and healthcare seems like the most opportune strategy for 2017.
Emerging markets have enjoyed a strong start to the year, with the MSCI Emerging Markets index returning 12.61 per cent year-to-date, compared with a 6.07 per cent rise in the FTSE 100 and a 3.18 per cent gain for the S&P 500.
Performance of indices in 2017
Source: FE Analytics
Greenberg says there has been relatively little activity within the portfolio more recently, continuing to hold around 60 names in the portfolio. Yet, he says he may look to refresh the portfolio during the coming months.
While activity in the fund has been low, Greenberg says he has added to several existing holdings.
The manager has added to a position in Abu Dhabi Commercial Bank, a UAE-based group with a strong franchise. Elsewhere, it has added to Brazilian bank Italbanco which has recently announced strong performance and is continuing to grow.
Greenberg says emerging markets have rebounded in recent months following a short period of uncertainty earlier in the year.
The manager adds that commodities prices have reached more sustainable levels, boosting sentiment for emerging markets.
However, he warns that there has been some concerns over the lack of support for new US president Donald Trump’s initial healthcare plans, suggesting that his push for corporate tax cuts could face some opposition.
Greenberg says it all adds up to a more “sober and realistic assessment of prospects for global growth”.
The FE Alpha Manager says his five crown-rated $1.7bn Hermes Global Emerging Markets fund is currently positioned with significant overweights to technology, consumer and healthcare stocks.
Indeed, a number of technology stocks dominate the firm’s top 10 holdings such as Korean firm Samsung Electronics and Chinese internet giant Tencent, reflecting the manager’s views on the growing importance of social networks and technology.
“Fundamentally, we want to be in the companies that fit into sustainable growth [theme] with profitability in excess of the cost of capital,” he said.
Greenberg says the fund continues to hold neutral views on countries with two notable exceptions.
He explained: “We’re not particularly bearish on any particular region except for Turkey and Greece: both very much have severe macro and political problems.”
With emerging markets performing strongly during 2016, inflows into passive vehicles targeting the sector have also surged.
According to asset manager BlackRock’s Global ETP Landscape report, flows into emerging markets equity exchange-traded products (ETPs) reached $16bn during the first four months of the year.
Source: BlackRock
The ETP provider noted: “Geo-political and strong dollar concerns have faded in recent months, while valuations, yields and economic growth prospects all remain attractive in a reflationary environment relative to developed markets.”
Greenberg says there has been a noticeable rise in the index as a result of increased fund flows to emerging markets.
He said: “The emerging market benchmark has moved up – it’s up about 15-16 per cent in US dollar terms. As active managers we have seen inflows ourselves.”
The manager added: “Emerging markets are priced correctly for right now, but the trends are for increasing profitability, better management at emerging markets companies and that has [led] to better returns on equity.”
Greenberg was recently named Best Emerging Markets Alpha Manager at the 2017 FE Alpha Manager awards, beating peers Glen Finegan at Henderson, BlackRock’s Will Landers, Edward Lam from Somerset Capital Management and JP Morgan’s Amit Mehta.
The fund, which Greenberg manages alongside co-manager Kunjal Gala, aims to achieve long-term capital appreciation by investing in companies with an emerging markets bias.
The fund has risen by 62.64 per cent over the past three years, compared with a 37.02 per cent rise in the benchmark MSCI Emerging Markets index and a 35.2 per cent gain for the average IA Global Emerging Markets sector peer.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
So far in 2017, the fund is up by 15.6 per cent to 15 May, compared with a rise of 12.61 per cent rise in the benchmark.
The fund has an ongoing charge figure (OCF) of 1.13 per cent, according to its latest key investor information document.