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
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?