Investec emerges as the leader

Horizon market fund earns its stripes

INVESTEC Asset Management’s horizon markets fund has just completed its first year and the returns to date have outstripped those of other emerging-market funds.

Although it’s aimed at the institutional market, some wealthy retail investors might consider a spin at the fringe of conventional assets.

Fund manager Kemal Ahmed said the typical emergingmarket fund was overweight on the big seven: the Brics, Taiwan and Korea. This amounts to a massive opportunity for those with the necessary diligence to explore the full investable universe of 59 countries.

According to Ahmed, there were in that universe 1 200 stocks that met the fund’s criteria. They took in a daily traded value of $5-billion and a total market capitalisation of $3.8-trillion.

“The big seven are a poor proxy for emerging markets, yet they dominate the emerg- ing-markets’ investment landscape. This leaves the rest underrepresented in investment strategies. Out of every dollar invested in emerging markets, 80c is going to those seven countries. Passive products are exacerbating this trend.

“Valuations in the larger emerging markets have become stretched as more and more money chases the same stocks in the same countries,” said Ahmed.

Colombia, Malaysia, Mexico, Turkey, Hungary, Egypt, Indonesia — the list avoids what everyone else is buying, but Ahmed insists this is not an illiquid or small-cap proposition. “There’s a $1.1-billion market cap median in the universe of stocks from which we select.”

It’s not that there isn’t any research being done in these markets.

“They’re just dwarfed by the big seven. There are more opportunities because less prospecting has been done in these markets. Good data is hard to find, but there is less capital going into that universe so investors stand to make more alpha. It’s a more volatile universe, but not by much.”

In fact, by November 30, he said the fund’s standard

The fund has outperformed the emerging market index

deviation was considerably less than the conventional emerging-markets index weighted to the big seven.

“When we buy and sell, it’s not in concert with investments in other Brics nations in the portfolio — which is often the case with other emerging-market funds — so one transaction has no bearing on others. A transaction is not a view on other emerging markets.

“Horizon markets have better current account positions and debt levels. If you add China, suddenly the emerging-market bloc is dragged down. These countries are solid. We factor in political risk. If we can’t find the right valuations, then we sit in cash,” he said.

Pulling together “deep local knowledge” is achieved partly through relationships with partner managers, who put together 25% of the fund’s net asset value.

“Local managers focus on their regions, and we have ongoing review and risk management procedures. We know what they hold and why. Companies must meet a $250million market cap and minimum liquidity threshold.

“We’re sector and industry-agnostic, looking only for wellrun, sustainable businesses with high barriers to entry and companies which are undervalued,” said Ahmed.

The other 75% is compiled by the Investec team, from a concentrated universe of up to 40 markets.

“The maximum weighting of any one stock is 5%, and there are no benchmarks. Cash-surplus, dollar-linked companies have performed well for us.”

The fund includes 130 stocks and began with an initial investment of $40-million from a central bank.

Its modest assets now sit around $48-million, but the returns have nudged 10% in dollar terms for the year.

“The fund has outperformed the emerging-market index by some distance. There is no other product out there structured like this one.”

Investec’s horizon markets fund charges a 1.5% asset management fee, alongside custody fees and a performance fee.

Getting in requires a minimum $10-million investment and involves a minimum lock-up of 90 days.