Along with Aberdeen, First State has proved to be the leading light in the emerging markets sector, consistently topping the tables thanks to its acute focus on quality businesses.
The five crown-rated Global Emerging Markets Leaders fund, which is headed up by Jonathan Asante, is the third best performer in the IMA Global Emerging Markets sector over the past 10 years and has also comfortably beaten its benchmark.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
However Rees, who co-manages the five crown-rated Premier Multi Asset Distribution fund, has sold his stake in the portfolio.
He says that as sentiment towards emerging markets has turned increasingly negative, investors have been forced to pay up for companies that are cash generative and have reliable earnings – the type of stocks that Asante focuses on.
He therefore expects the fund to underperform, as it is packed full of companies that are expensive on a price/earnings, price/book and price/sales basis.
“There isn’t an overvaluation in defensive stocks, but quality stocks,” Rees said.
“The likes of First State and Aberdeen have been buying them in abundance, which has been the perfect strategy. However, when people are fearful over the market outlook, they feel safer in companies with dependable earnings.”
“There is a valuation stretch there: even Angus Tulloch has been talking about the same thing recently.”
“We always check how expensive a portfolio is relative to the market. We sold out of First State Global Emerging Markets Leaders because there was a valuation risk. They are fantastic managers and we would hold them for forever and a day.”
“However, the valuation risk was just too great,” he added.
Rees is also very wary of the size of the First State fund.
“I do think that because of the amount of money they are now running, if they wanted to change their style now, they would have a lot of difficulty doing so,” Rees added.
The manager is the second expert in the space of 24 hours to raise concerns over a First State product. Investment trust specialist Numis told FE Trustnet that it prefers products that have the flexibility to look beyond quality companies.
Despite his concerns over Asante’s fund, Rees is becoming more bullish on emerging markets. The manager is positive on the developing world as it is growing faster than the West and – apart from China – these economies have good demographic profiles.
On top of that, Rees has been building up his position as those markets are now trading at a healthy discount to developed economies.
Rees has bought Julian Mayo’s five crown-rated Charlemagne Magna Emerging Markets Dividend fund to replace his holding in First State Global Emerging Markets Leaders.
“We met the managers and they followed the same philosophy as ours,” Rees explained.
“They invest in stable businesses that have good cash generation, a healthy balance sheet and with management teams that distribute to shareholders via dividends. More importantly, however, they look to locate a growing income.”
“We bought the fund in April and we were too early, as we felt the pain through June. However, we have built our position up over the summer. It was 3.5 per cent of the fund and while we have taken some profits, it still makes up 3 per cent,” he added.
The £112m Charlemagne Magna Emerging Markets Dividend was launched in June 2010.
Our data shows that it is the sixth best performing portfolio in the IMA Global Emerging Markets sector over that time, with returns of 27.44 per cent. The average fund in the sector has returned just 4.41 per cent.
Performance of fund vs sector since June 2010
Source: FE Analytics
The fund also boasts top-quartile returns over one and three years.
Rees says that a good and growing level of income is very important for his Premier Multi Asset Distribution fund. The Charlemagne fund has a yield of 4.84 per cent and Mayo has increased the net distribution over the last three years.
Rees likes the income approach to emerging markets.
“The good thing about income strategies, especially in the emerging markets, is that they can give you a natural value bias. That is because a company paying a high yield can be from having an attractive share price,” he explained.
Rees says his emerging markets income exposure was a toss-up between the Charlemagne fund and Somerset Emerging Markets Dividend Growth.
While he felt both funds had a good strategy, he preferred the Charlemagne portfolio as the manager had more experience in the equity income sector.
Rees manages the £237m Premier Multi Asset Distribution fund with David Hambidge, Simon Evan-Cook and David Thornton.
According to FE Analytics, it is the fifth best performing portfolio in the IMA Mixed Investment 20%-60% Shares sector over five years, with returns of 83.64 per cent, beating the sector by 35 percentage points.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund also sits in the top quartile over one and three years.
Although Rees is happy the fund has performed well on a total return basis, he says the managers’ objective is to deliver a good and growing income. It currently yields 3.67 per cent and it has grown its payout ratio over each of the last three years.
The managers find that level of income from a portfolio primarily geared to UK and global equity income funds. However, they also hold 31.9 per cent in fixed interest funds and a further 11 per cent in alternative assets.
Premier Multi Asset Distribution has an ongoing charges figure (OCF) of 2.24 per cent and requires a minimum investment of £1,000.
