Vi­brant emerg­ing mar­kets beckon Any global port­fo­lio needs to have ex­po­sure to the growth op­por­tu­ni­ties emerg­ing mar­kets of­fer. The Old Mu­tual Global Emerg­ing Mar­ket Fund has cap­i­talised on these op­por­tu­ni­ties, hav­ing gen­er­ated an an­nu­alised 13.9% since i

Finweek English Edition - - FUNDFOCUS -

over the last three years, the Old Mu­tual Emerg­ing Mar­ket Fund’s strong per­for­mance ranks it 12th out of a uni­verse of 155 global emerg­ing-mar­ket funds. Man­aged by Si­bon­iso Nx­u­malo and Feroz Basa of Old Mu­tual In­vest­ment Group’s Global Emerg­ing Mar­kets bou­tique (GEM), the fund’s ap­proach is to in­vest in su­pe­rior-qual­ity com­pa­nies that ex­hibit sound cor­po­rate gov­er­nance and are priced be­low their long-term in­vest­ment value.

The man­agers are cur­rently op­ti­mistic on the out­look for global emerg­ing-mar­ket (EM) prospects, with these trad­ing at about a 30% dis­count to de­vel­oped mar­kets on both priceto-earn­ings (P/E) and price-to-book ra­tios. Leon Kok spoke to Si­bon­iso Nx­u­malo, fund man­ager of the Old Mu­tual Global Emerg­ing Mar­ket Fund:

Why should new in­vestors look to EMs as a favourable propo­si­tion in the cur­rent un­cer­tain global in­vest­ment cli­mate?

The long-term EM story is struc­turally a no-brainer. It com­prises the fastest-grow­ing ge­ogra­phies, the youngest pop­u­la­tions, the most favourable bal­ance sheets, the low­est debt lev­els and the low­est credit pen­e­tra­tion. This has the po­ten­tial to ig­nite the largest struc­tural con­sump­tion boom the world has ever seen.

Look at China, with a pop­u­la­tion north of 1.5bn, and In­dia with 1bn. Both have enor­mous po­ten­tial pro­duc­tive and con­sump­tive power and ex­tend into the wider world. They won’t be recog­nis­able in 20 years’ time.

From a com­pany per­spec­tive, EM com­pa­nies are of­ten largely im­ma­ture relative to those in de­vel­oped mar­kets; they’re be­com­ing in­creas­ingly in­no­va­tive and they’re fu­ri­ously learn­ing from their de­vel­oped-mar­ket peers.

Out­sourc­ing of pro­duc­tion by the de­vel­oped economies to EMs is also likely to con­tinue, mainly be­cause of the more com­pet­i­tive state of EM com­pa­nies and lower costs of pro­duc­tion.

Would it be fair to say that EMs are in bet­ter shape than the late 1990s and early 2000?

With­out a doubt, ac­knowl­edg­ing though that every re­gional bloc has its ups and downs. There is an enor­mous dif­fer­ence be­tween the over­all sit­u­a­tion dur­ing the EM cri­sis in the late 1990s and now. China, for in­stance, has emerged as the world’s most pop­u­lous econ­omy and com­prises many ex­cel­lent global com­pa­nies. About 25% to 30% of In­dia’s 1bn peo­ple are now con­sid­ered mid­dle class, with this sec­tor grow­ing at 10% a year. Even Brazil has emerged as one of the big­gest and most dy­namic economies in the world.

Devel­op­ment in smaller coun­tries such as Tai­wan, Poland and Slove­nia is re­mark­able.

How­ever, aren’t you con­cerned about the sec­tor’s enor­mous neg­a­tive news­flow at present? Many coun­tries are be­ing hit by huge cur­rency and share price volatil­ity, l ower oil prices and strug­gling com­modi­ties.

We don’t pay too much at­ten­tion to neg­a­tive news­flow. We seek out strong busi­nesses that are able to sur­vive in the tough­est en­vi­ron­ments – es­pe­cially those with proven po­ten­tial, ex­cel­lent man­age­ment and ro­bust growth in both their do­mes­tic mar­kets and the wider world.The for­mer SABMiller and Shoprite are good ex­am­ples.

Would it be fair to say that EMs are cur­rently at their cheap­est in, say, a decade?

Yes, gen­er­ally they haven’t been cheaper than they have been since about 2003 (ex­clud­ing the global fi­nan­cial cri­sis). How­ever, the sit­u­a­tion dif­fers from mar­ket to mar­ket. The fund is strate­gi­cally po­si­tioned to have an un­der­weight in SA’s do­mes­tic in­dus­trial com­pa­nies, given the lower growth out­look and rel­a­tively high val­u­a­tions.

How closely cor­re­lated are you to the MSCI EM In­dex?

Our big­gest ex­po­sure is to “con­sumer dis­cre­tionary” (30.4%) as de­fined by the MSCI. It is very wide and in­cludes sec­tors such as auto com­pa­nies and ed­u­ca­tion. That’s fol­lowed by fi­nan­cials (17.5%), IT (16.3%), con­sumer sta­ples (12.7%), health­care (8.4%), ma­te­ri­als (6%), en­ergy (3.4%) and tele­com ser­vices (2.9%).

What are your top five hold­ings and what’s spe­cial about them?

TSMC MFG (Tai­wan) 5.1%, Sam­sung (South Korea) 4%, New Ori­en­tal Edu & Tech Group (China) 2.9%, Kro­ton Ed­u­ca­cional SA (Brazil) 2.9% and Hyundai Mo­tor Co (South Korea) 2.8%. TSMC, the world’s big­gest semi­con­duc­tor pro­ducer sup­ply­ing the likes of Ap­ple and Sam­sung, spends bil­lions an­nu­ally on re­search and devel­op­ment and has held up well against ma­jor at­tempts by Chi­nese and Amer­i­can com­pa­nies to dis­lodge it. Sam­sung is also a ma­jor player in this mar­ket, with a strong po­si­tion at most mar­ket lev­els. New Ori­en­tal and Kro­ton are ma­jor ed­u­ca­tional com­pa­nies – China’s love for ed­u­ca­tion is prob­a­bly greater than any coun­try in the world. They spend 40% of house­hold in­come per child on ed­u­ca­tion. The cor­re­spond­ing fig­ure in the US is 12%. Much of it is driven by the one-child pol­icy and to do the very best that they can for their chil­dren.

Which i nvestors are best suited to the fund and what would your rec­om­mended time­line be?

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