Reaching out for growth
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-
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
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).