Reach­ing out for growth

Finweek English Edition - - OLD MUTUAL INVESTMENT GROUP -

An i nt e r e s t i ng s how of ex­pan­sive think­ing at Old Mu­tual In­vest­ment Group has been the up­grad­ing of the global emerg­ing mar­kets (GEMs) sub-sec­tor to a fully-f ledged stand-alone fran­chise.

Pre­vi­ously, it fell un­der the Elec­tus um­brella, which has now mi­grated out of the Old Mu­tual fold.

Old Mu­tual In­vest­ment Group’s new Global Emerg­ing Mar­kets (GEM) bou­tique is headed by Si­bon­iso Nxumalo and Feroz Basa, with An­waar Wag­ner re­tained as port­fo­lio manager of the Old Mu­tual GEM Fund which was launched in Oc­to­ber 2011. The an­a­lysts on the team in­clude Wium Malan, Sharief Pansarey, Gus­tav Schu­len­burg and Izak Swanepoel.

All ac­tively travel the world to as­sess and choose mar­kets and com­pa­nies based on their bot­tom-up fun­da­men­tal-based ap­proach to in­vest­ing.

Basa ar­gues three good rea­sons for South African in­vestors to con­sider the GEM propo­si­tion: f ive of the top 10 largest economies in the world (China, In­dia, Rus­sia, Brazil and In­done­sia) are emerg­ing mar­kets; GEMs cur­rently gen­er­ate 54% of world GDP; and their weight­ing in global eq­uity in­dices is a mere 4% with huge up­side po­ten­tial.

Also sig­nif icant, he be­lieves, i s that the South African eq­uity mar­ket is ex­pen­sive rel­a­tive to other lead­ing GEMs and of­fers only a frac­tion of the op­por­tu­nity pre­sented by the oth­ers.

“A key part of long-term eq­uit y re­turns lies in the price you pay when buy­ing shares. If qual­ity shares are over-

80%

70%

60%

50%

40%

30%

20%

10%

0% priced and ex­pen­sive when you buy them, it is very dif­fi­cult to achieve good medium to long-term re­turns,” he says.

“A case in point is SABMiller, which is trad­ing on a 25 times P/E com­pared to, say, Den­mark’s Carls­berg on 15 times P/E mul­ti­ple. Euro­pean mar­kets aside, Carls­berg is the largest brewer in Rus­sia and en­deav­our­ing to de­velop its Asian op­er­a­tions to cap­ture the growth po­ten­tial of that re­gion.”

Basa con­cedes that emerg­ing mar­kets are gen­er­ally trail­ing their peers in de­vel­oped mar­kets, but be­lieves that they will have their day again when the cy­cle changes and money pours back into them. But there are op­por­tu­ni­ties whichever way you look at it. When peo­ple run away, this is a good time to get in.

Be­sides, many de­vel­op­ing mar­kets, some of the Gulf coun­tries like Kuwait, Qatar and the UAE have been fairly re­li­able plays. Their cur­ren­cies are pegged to the US dollar, and be­cause of

16%

14%

12%

10%

8%

6%

4%

2%

0% limited liq­uid­ity, have been less prone to the f light of spec­u­la­tive hot money.

Basa em­pha­sises that their GEM bou­tique places a high pre­mium on qual­ity busi­ness mod­els; a high mar­gin of safety in their fun­da­men­tal val­u­a­tions; and high gov­er­nance and cash f low stan­dards.

“Typ­i­cal of what we’ d avoid is Thai­land’s BEC World, which ranks well on qual­ity and val­u­a­tion, but has a low level of dis­clo­sure on re­mu­ner­a­tion and in­cen­tives; seven out of 14 board mem­bers are fam­ily; and the fa­ther is chair­man and the son is the CEO.”

The GEM Fund has gen­er­ated an av­er­age an­nual 13.1% dur­ing the past three years com­pared with the Bench­mark MSCI Gem at 11.8%. The cur­rent for­ward P/E ra­tio is 12.1 times, the free cash f low yield 10.5%, and the port­fo­lio up­side to fair value 42%. The cor­po­rate gov­er­nance score is 70%.

The fund is one of only three where the GEM team is glob­ally based in an emerg­ing mar­ket with a proven track record.

Its top 10 com­pa­nies at present are Len­ovo Group (China), Tata Mo­tors ( In­dia); Bril­liance China Au­to­mo­tive (China), Richemont (Switzer­land), Carls­berg ( Den­mark), ITAU Bank Hold­ings SA (Brazil) Ak­bank (Turkey), Baidu (China), X5 Re­tail (Rus­sia) and Sam­sung Elec­tron­ics (South Korea).

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.