Companies paying dividends, value styles and smaller-cap strategies are three ways the managers of Waverton’s model portfolios are gaining exposure to Asia and the emerging markets.
Across the discretionary investment house’s balanced portfolio, the team has taken a 12.5 per cent position weighting towards emerging markets and represents 18.5 per cent of its underlying equity portfolios.
Asia and the emerging markets are one of just two areas the portfolio is overweight, with Japanese equities the other area. Later this week FE Trustnet will also look out how the team are exposed to the latter asset class.
“In terms of the overweights, we are marginally overweight Asia and the emerging markets and have increased that recently and more overweight in Japan,” portfolio manager Luke Hyde-Smith said.
“Asia and emerging markets clearly there is value there. There is no doubt that up until the end of 2015 Asia and emerging market equities was an unloved asset class.”
Indeed, the MSCI Emerging Markets index lost 23.64 per cent from April 2015 to January 2016 and is still 7.51 percentage points behind the broader MSCI All Countries World index.
Performance of indices over 10yrs
Source: FE Analytics
“It [emerging markets] was overlooked by international investors and consequently there was a clear valuation argument at the beginning of 2016 that you should increase exposure there or certainly at least look at it,” Hyde-Smith said.
“That coincided with the Chinese providing more stimulus to the economy which provided a catalyst to increase exposure to the region.”
The manager added that while the market has caught up since then, he remains constructive on the economic outlook in emerging markets.
Within the sector however he said they use a completely active approach, with a combination of three funds that are “worth paying active fees for”.
“If we don’t think it is worth paying the active fee we will happily use an ETF [exchange-traded fund] but within emerging markets there really are plenty of opportunities,” he said.
Hyde-Smith added: “We have got three global emerging markets strategies which are differentiated in their own right. One has got a bit of small-cap bias, one has got a bit of an income bias and one has got a value tilt with a little bit of frontier market exposure.
“I would say all of those are significantly different to the benchmark although they would be classified as broad emerging markets funds they are definitely not giving you the same exposure as a passive ETF.”
The first is the £1.4bn MI Somerset Emerging Markets Dividend Growth fund run by FE Alpha Manager Edward Lam and deputy manager Edward Robertson.
The four FE Crown-rated fund has consistently beaten its benchmark and the IA Global Emerging Markets sector average over one, three and five years and is the third best fund in the sector since its launch in 2010.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“We like that strategy because it is conviction-led. It has 40 stocks and is quite concentrated with manager targeting dividend growth within emerging market companies,” Hyde-Smith said.
He said companies with the discipline to pay dividends and have a history of delivering earnings on a consistent basis take some of the risk away from the asset class and is something investors have been paying more attention to in recent years.
“He [Lam] is very happy to be significantly different to the benchmark and at the moment one of the big views they have is on Korea which is up to 20 per cent of the fund – a major overweight.
“They think there is significant value there both from potential multiple expansion but also from potential dividend growth.
“It has not historically been a high divided market – it is not known for its income attributes but Ed Lam thinks that is changing and some of the corporate noises coming out of companies like Samsung are very interesting indeed.”
He compliments the concentrated MI Somerset Emerging Markets Dividend Growth fund with the broader RAM (LUX) Systematic Funds Emerging Markets Equities fund run by Thomas de Saint Seine.
“It is a Geneva-based firm and that is actually quite quantitative in nature. It is looking at value, quality and momentum and has a very diverse list of holdings – up to 900,” the portfolio manager said.
“The reason we like that is because that large number of holdings has a large exposure to smaller companies and we think within the emerging markets if you are trying to buy the domestic consumer story, which is what we are trying to get access to, where that is most pronounced is down the market cap scale.
“The reason we like this fund is it is systematic. We know what we are getting, we understand the process and we like and it has clearly added value over time.”
The £2.1bn fund has beaten the sector over five years though it has struggled more recently, returning 6.73 per cent over the last three years, 1.47 percentage points below the sector average.
The third fund Hyde-Smith uses for exposure to the emerging markets is the £256m RWC Global Emerging Markets fund run by John Malloy.
“The more recent addition was RWC and one of the important attributes here is it proves we’re happy to back managers and funds early,” Hyde-Smith said.
“The team running the fund joined RWC from a firm called Everest Capital which was a hedge fund that had a difficult period but that was not due to the emerging markets team - their performance was exceptional.”
This has continued at RWC, where he said the fund has “delivered some impressive numbers”.
The Oeic version of the fund launched in January 2016, during which time it has returned 102.2 per cent, ahead of both the IA Global Emerging Markets sector average and the MSI Emerging Markets benchmark.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund is focused on fundamental research but also uses a macroeconomic overlay, meaning they look at companies that will have a tailwind from the macro – which is still an important factor in emerging markets, the manager said.
“It is all very well saying you are in great companies but if the political situation is deteriorating markedly for example then there is no doubt the market will suffer.”