A significant buying opportunity has opened up in the Skagen KonTiki fund, according to Sarasin’s Lucy Walker, who has initiated a position in it due to its distinct value approach to emerging markets – unlike most of its peers which follow the Aberdeen and First State quality growth strategy.
Despite its substantial £2.9bn size, Skagen KonTiki is a relatively unknown entity in the UK. There are a number of reasons for this, of course, given the Norwegian-based group only recently joined the Investment Association universe.
On top of that, Skagen KonTiki – despite being benchmarked against the MSCI Emerging Markets index – sits in the IA Global sector rather than the IA Global Emerging Markets sector as the managers can invest up to 50 per cent in developed market-listed companies that derive the majority of their earnings from the emerging markets (though that tranche of the portfolio has never exceeded 20 per cent since its launch in April 2002).
Nevertheless, it has been one of the best and most consistent performers in the emerging market equity space over the longer term.
According to FE Analytics, Skagen KonTiki has more than doubled the gains of the MSCI Emerging Markets index, the IA Global Emerging Markets sector and the IA Global sector since its launch with returns of 576.49 per cent.
Performance of fund versus sectors and index since launch
Source: FE Analytics
It means it has beaten every fund in the emerging market peer group over that time, including the popular Aberdeen Emerging Markets Equity portfolio, which is some 200 percentage points behind the Skagen offering over the period in question.
On top of that, the fund has outperformed the index in 10 out of the last 12 calendar years (a feat unmatched by any emerging markets fund) having surpassed its benchmark in each year between 2002 and 2012.
However, Skagen KonTiki’s relative performance has dropped off somewhat of late but Walker says this is a positive rather than a negative and has used it as a reason to build up a 5.4 per cent position in the portfolio for her five crown-rated Sarasin Fund of Funds Global Equity fund.
“I’ve been tracking Skagen for some time now, having met the managers five years or so ago,” Walker (pictured) said.
“It was really at the top of the pile then as its performance had been strong for some time, but I was looking for a better opportunity to buy in as I was slightly worried about how well it had done.”
“That is what has led us to buy in recently. We felt the recent underperformance has provided a good entry point into a fund led by highly-able managers with an exceptional long-term track record.”
As mentioned earlier, the fund has only underperformed against the index in two of the last 12 calendar years – 2012 and 2014.
It is also struggling against its benchmark in 2015, which has turned about to be another disastrous year for emerging markets as China’s equity market bubble burst and there were fears of a hard landing in its economy, which has led to falling commodity prices and negative implications for many other developing economies.
FE data shows Skagen KonTiki has lost 14.54 per cent over the past two years, posting substantially larger losses than the index and the IA Global Emerging Markets sector in the process.
Performance of fund versus sector and index over 2yrs
Source: FE Analytics
Erik Landgraff, co-manager of the fund, says most of that underperformance has come about due to its value approach, which is very different to the processes used by the large majority of funds in the emerging markets peer group.
“There have been a confluence of factors, but that is certainly one of them. There has been this winner takes all environment as the popular stocks have only become more popular, while the unpopular have remained unpopular,” Landgraff said.
The data certainly seems to suggest that the Skagen KonTiki team have been fighting an uphill battle over recent years as investors who have wanted emerging market exposure have tended to favour ‘safer’, but therefore more expensive, companies due to all the risks which have faced the asset class.
For example, while the MSCI Emerging Markets Growth index is down 2.93 per cent over the past five years, the MSCI Emerging Markets Value index has lost 17.13 per cent.
Performance of indices over 5yrs
Source: FE Analytics
However, with the asset class having falling so far out of favour relative to developed markets over recent years, Walker says a value approach will be the best way to play the next leg of the emerging markets story.
“I’m quite a value investors anyway, but I’ve always felt they are an excellent management team. On the back of emerging markets struggling, we feel this has provided an opportunity to buy a fund which is run by managers with a value style,” Walker said.
“If emerging markets recover, this fund should do very well.”
A number of market commentators have spoken about the changing dynamics within the emerging markets space, such as the former head of multi asset at Old Mutual, John Ventre.
He told FE Trustnet last year that he was looking for value funds as with growth slowing in the developing world, the tried and tested quality growth approach which is championed by the top-performing Aberdeen and First State offerings and replicated by the large-majority of the peer group’s managers may not be suitable any more.
“We have been looking for some time for some emerging market managers with a value bias. Emerging markets have really been a growth story over the last 10 to 15 years,” Ventre said earlier this year.
“In the context of a ‘de-emerging markets’ theme and as the growth outlook looks a lot less certain, while at the same time valuations looks really compelling, in turn the usual manager selection on its head.”
He added: “The very successful quality growth managers out there in the market, which we have owned historically, are probably not best positioned to capture the new dynamic in emerging markets.”
Performance of funds versus sector over 10yrs
Source: FE Analytics
However, while there are few value funds in the Asia Pacific ex Japan space (such as Hermes Asia ex Japan and Prusik Asian Equity Income, both of which are now closed) Skagen KonTiki seems to be the only top-performing global emerging markets fund which buys out of favour companies where a positive catalyst for change is on the cards.
For example, while Landgraff says he and the team focus on downside protection, the fund is now trading on average P/E of just 8.3 times compared to the index’s multiple of 11.4 times.
This process has led them to buy the likes of Yazicilar Holding, a Turkish consumer-facing holding company which is trading at a substantial discount to NAV largely due to its place of listing despite the quality and sustainability of its brands.
Landgraff says it is odd that so few of his peers are genuine value investors, but believes his style will outperform over the long term.
“I think value investing requires certain psychological make-up as you need to be able to withstand the short-term pressure. Again, that is what makes value work in the long term – you have to endure periods of underperformance. That is the whole point,” he said.
“If you didn’t, everyone would be a value investor, wouldn’t they.”
“There is both the manager themselves, but also the institutional set-up. To do it well, you really need a proper long-term way of thinking both from your clients and the principles within the company so you are equipped to take those long-term bets and not get de-railed along the way when things don’t work out in the short run.”
He added: “I think with the institutional pressures that exist in our industry, in general, that is a critical point.”
Skagen KonTiki, which is significantly overweight the industrial and consumer discretionary sectors, has a total expense ratio of 1.11 per cent.