A relatively new entrant to the emerging markets scene, having launched in 2011, the $664.92m (£399.9m) Nordea 1 – Emerging Stars Equity fund has outperformed the MSCI Emerging Markets index in a difficult time for the region.
Manager Jorry Noeddekaer says the aim of the fund is “to generate a significant level of outperformance relative to the broader emerging markets universe with an information ratio of +0.5 on a three-year rolling basis. So far, we have been significantly above this level”.
The investment process was specifically designed for the fund and is a fundamental bottom-up process. The team tries to identify undervalued stocks that have good growth opportunities but seem to be mispriced by the market.
Mr Noeddekaer, who has managed the fund since launch, explains: “We are focused on the detailed company analysis and we are valuation-driven. As part of the process, we integrate a very rigorous environmental, social, governance (ESG) analysis, as we believe it reduces risk.
“This ESG overlay helps to better understand the given companies’ stakeholder environment and therefore adds value to the strategic analysis. We are relatively long term in our thinking and believe we can identify fundamental inefficiencies in the market across a one- to three-year time horizon. We are stockpickers with a growth at a reasonable price (Garp) mind-set.”
Macroeconomic factors play a role in the fund, with the team conducting some structural macroeconomic analysis that is used as part of the process to find new investment ideas.
“We believe that an improving economic scenario can generate a good environment for companies, and that certain types of economic growth can benefit specific business models,” explains Mr Noeddekaer. “We also believe that macroeconomic analysis can be very helpful from a risk-management perspective. We do not try to catch short-term macroeconomic news flows or try to forecast quarterly GDP data.”
From launch to March 26 2014, the fund has recorded a small loss of 3.12 per cent, according to FE Analytics, although this still places it ahead of the MSCI Emerging Markets index loss of 12.24 per cent in the same period.
In 2013, the fund recorded a loss of 0.91 per cent, which was still ahead of the index loss of 4.08 per cent, while 2012 was a much better year, with the fund recording a strong 17.74 per cent, compared with the index return of 13.42 per cent.
The manager notes: “We run a relatively concentrated fund and we follow each position closely, relative to its target price and risk level. If a stock performs very well given the underlying fundamentals and gets closer to its target price, we reduce its weight.
“On the other hand, if the stock underperforms considerably relative to its underlying fundamentals, we do the opposite. The portfolio is now close to three years old, and many of the stocks that we had in the portfolio in the beginning are still in the portfolio today.”
Overall, the fund has benefited from its stock selection in sectors including IT, pharmaceuticals and the consumer space. IT is currently the highest sector weighting in the portfolio, at 26.05 per cent of the fund.
“We have a strong conviction in the internet and media revolution that has impacted us in recent years,” explains Mr Noeddekaer. “Stocks like Tencent, Qihoo, Zee Entertainment and Naspers have been very good performers. We have also had some very good pharma and healthcare positions performing very well. In the consumer space, we have been avoiding some of the expensive consumer staple names but have managed to pick some strong consumer discretionary names like Tata Motor and New Oriental Education.”
Looking ahead, the manager acknowledges potential difficulties in the region, stating: “In the short term, we believe that the rest of the first half of 2014 will be difficult for global emerging markets (GEM), even if we believe that the worst underperformance is over. We believe in a stronger second half, with a clearer political environment in key GEM countries.”
EXPERT VIEW
Darius McDermott, managing director, Chelsea Financial Services:
VERDICT:
“This fund is slightly different in that stocks are positively screened before they are selected. Nordea’s thematic investment process focuses on structural changes within technology, demographics and globalisation. Attractive companies best complying with and benefiting from ESG [environmental, social and governance] issues make up the portfolio. The managers are looking for companies that have the potential to grow and establish themselves as global players. At present, it has a high weighting in Asian equities, in line with the benchmark. IT companies dominate the top 10 holdings. In terms of performance, it has had a decent, if volatile, start – there is more to prove. It will be interesting to see how the weighting to Asia develops over time.”
